Eurozone inflation hit a 13-year high in September, rising at its fastest pace since 2008 as energy costs skyrocketed, with analysts warning that high inflation could continue for several months.
Consumer price inflation in the 19 countries sharing the euro accelerated to 3.4 per cent in September compared with the same month a year ago, up from 3 per cent in August, according to Eurostat, the EU's statistics agency.
Higher energy prices were the main driver for the surge, increasing by 17.4 per cent, with the effect of production and shipping bottlenecks also playing a part as the price of durable goods rose 2.3 per cent from August.
“Food inflation was little changed on the month, but energy inflation rose from 15.4 per cent to 17.4 per cent due to the combined impact of rising oil, gas and electricity prices,” said Jack Allen-Reynolds, senior Europe economist at Capital Economics.
“Services inflation jumped from 1.1 per cent to a 21-month high of 1.7 per cent, perhaps due to rising prices in the hospitality and travel sectors as tourism numbers rose."
With the price of natural gas surging and supply chain bottlenecks affecting everything from car production to computer manufacturing, inflation could hit 4 per cent by the end of the year, analysts said.
This is twice the ECB's target of 2 per cent, but until now the central bank has maintained that any price increases are temporary and will decline relatively quickly in early 2022.
ECB President Christine Lagarde said this week that the central bank must not overreact to rising inflation, but she struck a more cautious tone around the risks of higher prices.
Supply-chain disruptions appear to be getting worse, raising the chances that the inflation hump seeps into underlying prices and creates more permanent pressures as companies adjust pricing and wage policy.
Central banks may be underestimating the inflation risk with “firmer action” needed to combat an accelerating rate of price growth, said Sam Miley, senior economist at the Centre for Economics and Business Research, “if inflation were to take on more structurally-embedded characteristics, such as via wage inflation".
Growth in energy prices is being driven by several sources, with the wholesale gas market particularly affected.
“Prices have soared amidst curtailed production levels, low international storage levels and elevated levels of global demand. For instance, supplies of gas to Europe from Russia have been limited recently due to heightened domestic demand in the latter,” Mr Miley said.
“Looking ahead, energy prices are expected to remain elevated, putting further upward pressure on the rate of price growth. Indeed, this situation could worsen if supply shortages linger into the winter months, when demand for energy typically surges.”
The ECB said earlier this month it would trim the pace of its asset purchases over the coming quarter as it took a tentative step towards unwinding emergency economic aid that supported the economic zone during the pandemic.
The central bank said it would buy bonds under its €1.85 trillion Pandemic Emergency Purchase Programme (Pepp) at a pace moderately lower than the €80 billion ($92.75 billion) a month it bought over the previous two quarters.
The eurozone’s economic recovery is expected to continue despite the supply shortages, with 4.6 per cent of annual growth expected in 2021, followed by 4.1 per cent in 2022.
Worries over the price hikes are partly vindicated by core inflation, which strips out energy and other items and stood at 1.9 per cent, up from 1.6 per cent a month earlier.
Even though inflation "is likely to fall sharply next year", to below 2 per cent, Mr Allen-Reynolds said the current high rates will probably ”raise the chance" of the ECB announcing the end of its Pepp in March at its December meeting.
Energy prices are becoming a growing concern in Europe, with countries considering a wide range of emergency plans to lower prices for consumers.
Brussels is preparing a series of short-term measures, such as cutting value-added tax and excises on energy, in the hope of preserving commitments for more renewable energy sources.