As the euro-area grows, so does euro-area inflation rate. Overall, the inflation rate reached 4.9 percent by year’s end. Some see the rise in prices moderating next year. While others see it persisting and posing a threat to the economic recovery.
With the rise in oil prices and supply bottlenecks making global trading more expensive in 2021, consumers around the world are coping with higher prices. Central banks in Europe and the United States are beginning to reduce their stimulus programs. Yet the European Central Bank plans to continue purchasing assets, albeit at a slower pace, while maintaining its policy of zero-to-negative interest rates into 2022.
What’s interesting is that the inflation rate varies widely in the eurozone, from a moderate 2.2 percent annualized increase in prices in Greece to a high of 9.2 percent spike in Lithuania.
Still, price increases in every are above the 2 percent target for inflation. Moreover, the ECB isn’t likely to adjust its interest rate policies until at least March.
While some analysts welcome the rise in prices, others see it as a concern that poses a threat to Europe’s economic recovery.
The Upside: No Deflation
In a speech in November, Klaas Knot, president of the Netherlands Banks, said the rise in inflationary prices after such a long period of deflationary risk “is rather welcome.” He said he saw factors such as a temporary reduction of the German VAT-rate expected in January and stabilizing oil prices bringing down price spikes. Meanwhile, euro-area employment has nearly returned to pre-pandemic levels, Knot said.
Knot said the inflation outlook is “characterized by elevated uncertainty.” However, he thinks “transitory factors still dominate the inflation picture.”
Persistent Price Spikes
Other analysts see inflation continuing to pose problems for the eurozone. For example, 40 percent of 38 economists surveyed by the Financial Times see inflation posing a “significant risk” to Euro-area countries. “Inflation will eat into wages, reducing demand,” Jesper Rangvid, a finance professor at the Copenhagen Business School, told the FT’s Martin Arnold in a report published today.
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