Eurozone inflation at record high as Omicron dents economic rebound

Eurozone’s inflation rate hit a record high in December as the economy came under renewed stress amid surging Omicron infections and tighter restrictions.

Annual inflation in the 19 countries sharing the euro rose to 5 per cent, from 4.9 per cent the previous month, according to the European Union’s statistics agency Eurostat, with energy prices the main driver with an uplift of 26 per cent.

"European inflation hit a new high 5 per cent, above expectations and accelerating for a sixth month. This is the highest rate since 1985, but likely near peak levels and lower than the US,” said Ben Laidler, global markets strategist at multi-asset investment platform eToro.

"Prices are being driven by supply chain disruptions and higher energy prices. For example, European natural gas prices have risen fivefold in the last year. The European Union is seeing widely different price rises, with inflation in France and Italy only 2.8 per cent and 3.9 per cent respectively, versus Germany’s 5.3 per cent and Spain’s 6.7 per cent price surge.”

With infections breaking records almost daily as the Omicron variant sweeps across Europe, eurozone growth is expected to take a hit at the start of this year even though governments have largely avoided the restrictive measures that brought their economies to a standstill a year ago.

“The latest surge in Covid infections makes us expect first-quarter growth to be slower than previously anticipated,” said Nicola Nobile at Oxford Economics.

“However, assuming that the health situation does not lead to hard lockdowns, we expect the economy to recover the lost ground by mid-year, with the impact over this year as a whole being very mild."

Meanwhile, the European Commission's Economic Sentiment Indicator, a key gauge of the bloc's economic health, fell more sharply than forecast in December to a level last seen in May, with the outlook for services significantly worse and employment expectations also down.

The slowdown is already evident in the bloc’s biggest economy, Germany, where supply chain bottlenecks have held back the country’s vast factory sector for most of the last quarter, with industry unexpectedly stumbling in November.

Output fell 0.2 per cent on the month, reinforcing views that the German economy stalled in the fourth quarter of last year, with no relief in sight for months.

"Unfortunately, this is where the rebound of German industry stops for the time being. The fourth wave of the pandemic and Omicron should send industrial activity back into hibernation," ING economist Carsten Brzeski said.

The only bright spot for the eurozone economy was its retail sales, which rose 7.8 per cent compared with a year earlier and 1 per cent on the month, driven by in-store non-food purchases, indicating that consumer demand was healthy even as new pandemic-related restrictions were implemented.

But heavy spending by households, who had little choice but to stash their cash over the past year during restrictions, is pushing consumer prices to new records.

Higher inflation should be short-lived, according to economists, once high energy prices drop off.

“We suspect that December was the peak in eurozone inflation. Base effects related to Germany’s VAT cut in the second half of 2020, together with the re-weighting of items in the HICP basket, are likely to knock about 0.5 per cent off headline inflation in January this year,” said Jack Allen-Reynolds, senior Europe economist at Capital Economics.

“Meanwhile, energy inflation is almost certain to drop sharply. We forecast that the contribution of energy to headline inflation will fall from 2.5 per cent in December 2021 to around zero in December this year.”

While most of the inflation drivers are temporary, many analysts, including some influential policymakers, doubt the European Central Bank’s benign narrative that price growth will be back below its 2 per cent target by the end of the year.

Part of their concern is that increases in underlying prices – or inflation excluding volatile food and fuel prices – are also above target, suggesting that sectors prone to weak inflation over the past decade are now adjusting.

"We believe we are near peak inflation, as supply chains loosen, and well below US levels of 6.8 per cent,” Mr Laidler said.

“This is keeping the ECB dovish, with no interest-rate increase expected this year. It is also keeping the euro weak, a key support for European company profits and exports."

Williams at Wimbledon

Venus Williams - 5 titles (2000, 2001, 2005, 2007 and 2008)

Serena Williams - 7 titles (2002, 2003, 2009, 2010, 2012, 2015 and 2016)

Israel Palestine on Swedish TV 1958-1989

Director: Goran Hugo Olsson

Rating: 5/5

More from Aya Iskandarani

Why Hezbollah’s man in Iraq is now worth $10 million to the US

New bill introduced to Congress could take a toll on Lebanese army

How Tripoli became Lebanon's protest capital

Islamophobia definition

A widely accepted definition was made by the All Party Parliamentary Group on British Muslims in 2019: “Islamophobia is rooted in racism and is a type of racism that targets expressions of Muslimness or perceived Muslimness.” It further defines it as “inciting hatred or violence against Muslims”.

Living in...

This article is part of a guide on where to live in the UAE. Our reporters will profile some of the country’s most desirable districts, provide an estimate of rental prices and introduce you to some of the residents who call each area home.

Jawan

%3Cp%3E%3Cstrong%3EDirector%3A%20%3C%2Fstrong%3EAtlee%3C%2Fp%3E%0A%3Cp%3E%3Cstrong%3EStars%3A%3C%2Fstrong%3E%20Shah%20Rukh%20Khan%2C%20Nayanthara%2C%20Vijay%20Sethupathi%26nbsp%3B%3C%2Fp%3E%0A%3Cp%3E%3Cstrong%3ERating%3A%20%3C%2Fstrong%3E4%2F5%3C%2Fp%3E%0A

Four reasons global stock markets are falling right now

There are many factors worrying investors right now and triggering a rush out of stock markets. Here are four of the biggest:

1. Rising US interest rates

The US Federal Reserve has increased interest rates three times this year in a bid to prevent its buoyant economy from overheating. They now stand at between 2 and 2.25 per cent and markets are pencilling in three more rises next year.

Kim Catechis, manager of the Legg Mason Martin Currie Global Emerging Markets Fund, says US inflation is rising and the Fed will continue to raise rates in 2019. “With inflationary pressures growing, an increasing number of corporates are guiding profitability expectations downwards for 2018 and 2019, citing the negative impact of rising costs.”

At the same time as rates are rising, central bankers in the US and Europe have been ending quantitative easing, bringing the era of cheap money to an end.

2. Stronger dollar

High US rates have driven up the value of the dollar and bond yields, and this is putting pressure on emerging market countries that took advantage of low interest rates to run up trillions in dollar-denominated debt. They have also suffered capital outflows as international investors have switched to the US, driving markets lower. Omar Negyal, portfolio manager of the JP Morgan Global Emerging Markets Income Trust, says this looks like a buying opportunity. “Despite short-term volatility we remain positive about long-term prospects and profitability for emerging markets.”

3. Global trade war

Ritu Vohora, investment director at fund manager M&G, says markets fear that US President Donald Trump’s spat with China will escalate into a full-blown global trade war, with both sides suffering. “The US economy is robust enough to absorb higher input costs now, but this may not be the case as tariffs escalate. However, with a host of factors hitting investor sentiment, this is becoming a stock picker’s market.”

4. Eurozone uncertainty

Europe faces two challenges right now in the shape of Brexit and the new populist government in eurozone member Italy.

Chris Beauchamp, chief market analyst at IG, which has offices in Dubai, says the stand-off between between Rome and Brussels threatens to become much more serious. "As with Brexit, neither side appears willing to step back from the edge, threatening more trouble down the line.”

The European economy may also be slowing, Mr Beauchamp warns. “A four-year low in eurozone manufacturing confidence highlights the fact that producers see a bumpy road ahead, with US-EU trade talks remaining a major question-mark for exporters.”

'The worst thing you can eat'

Trans fat is typically found in fried and baked goods, but you may be consuming more than you think.

Powdered coffee creamer, microwave popcorn and virtually anything processed with a crust is likely to contain it, as this guide from Mayo Clinic outlines:

Baked goods - Most cakes, cookies, pie crusts and crackers contain shortening, which is usually made from partially hydrogenated vegetable oil. Ready-made frosting is another source of trans fat.

Snacks - Potato, corn and tortilla chips often contain trans fat. And while popcorn can be a healthy snack, many types of packaged or microwave popcorn use trans fat to help cook or flavour the popcorn.

Fried food - Foods that require deep frying — french fries, doughnuts and fried chicken — can contain trans fat from the oil used in the cooking process.

Refrigerator dough - Products such as canned biscuits and cinnamon rolls often contain trans fat, as do frozen pizza crusts.

Creamer and margarine - Nondairy coffee creamer and stick margarines also may contain partially hydrogenated vegetable oils.