Inflation in the euro area, at new records. The ECB is preparing

Reading time: 3 minutes

Data from the European Bureau of Statistics, released on Friday morning, show that inflation in the euro area reached a new record in June, reaching 8.6% annually. The announcement comes just before the European Central Bank (ECB) operates its first monetary policy rate hike in the eurozone in 11 years, CNBC reported.

Preliminary figures showing inflation reaching 8.6% in June are stricter than expectations announced by a Reuters survey of economists, who anticipated 8.4% inflation. Even so, the data showed an acceleration in price growth in the euro area, after annualized inflation in May was 8.1%.

Earlier this week, Germany surprised markets by reporting a 0.5 percentage point drop in month-on-month inflation. Experts noted that this was surprisingly due to the entry into force of new government subsidies aimed at reducing the impact of higher energy prices, especially for the vulnerable population, adding that the increase in the inflation rate is far from over.

Both France and Spain set new inflation records in June. For example, in Spain, inflation exceeded the 10% threshold for the first time since 1985, according to Reuters.

The ECB’s ballet between rising interest rates and the risks of recession

The European Central Bank, through the voice of President Christine Lagarde, has repeatedly promised to do everything possible to calm inflation. Frankfurt decision-makers are due to meet at the end of July to announce a first increase in interest rates in the last 11 years. It is quite clear that a further increase will take place at the ECB meeting in September, which could mean that rates could return to positive territory this year. ECB interest rates have been negative since 2014.

At a conference she attended this week in Portugal, Christine Lagarde gave new signals on rising interest rates, even after September:

“If the inflation outlook does not improve, we may have enough reasons to move faster,” Lagarde said.

However, more and more questions are being raised about the future of monetary policy in the euro area, amid fears of a recession in the coming months. If the ECB were to raise rates rapidly, this move could put even more stumbling blocks on economic growth, at a time when it is already decelerating.

Basically, many analysts wonder not if the recession will occur, but only when it will happen: from this year or only from 2023?

Berenberg analysts predict a recession in the euro area in 2023, with a contraction in GDP of 0.8%.

However, economic pressures caused by Russia’s invasion of Ukraine – especially on energy and food security – could push the eurozone economy into recession sooner than previously expected.

So far, European officials have avoided talking about a recession:

“We still expect positive growth rates, especially thanks to the amortization measures taken by national governments against the loss of growth,” Lagarde said earlier this week.

The ECB forecast a 2.8% increase in the region’s GDP in June this year, but a new updated forecast is expected in September.

Beyond these optimistic statements, Frankfurt decision-makers are aware that the economic downturn is a major risk that they need to monitor closely. Philip Lane, the ECB’s chief economist, said vigilance should be kept to a minimum in the coming months:

“Beyond all the uncertainties, we have to manage two big and wide risks. The first is given by market forces that could keep inflation high longer than we would have expected. The second is the risk of a slowdown in the economy, which, it is true, would reduce inflationary pressures. The balance between the two is fine, “Lane said in an interview with CNBC reporter Annette Weisbach on Tuesday.