Eurozone inflation remains well above the ECB’s target as energy and food prices skyrocket.
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Eurozone inflation has hit a record high for the sixth straight month, raising new questions about how the European Central Bank will respond.
Overall inflation in the 19-member region reached 7.5% in April, according to preliminary estimates from the European Statistics Office released Friday. In March, the figure stood at 7.4%.
European Central Bank Vice-President Luis de Guindos on Thursday tried to reassure lawmakers about rising prices, saying the eurozone is close to hitting peak inflation. The central bank sees price pressures easing in the second half of this year, although energy costs are expected to keep inflation relatively high.
The latest inflation reading comes amid concerns about the ongoing war in the Ukraine war and its subsequent impact on Europe’s energy supply – and how it could affect the region’s economy.
Rising energy prices contributed the most to inflation in April, although they were slightly lower than the previous month. Energy prices rose 38% year-on-year in April, compared to a 44.4% increase in March.
Earlier this week, Russian energy company Gazprom stopped gas flows to two EU countries because they did not pay for the raw material in rubles. The move sparked fears that other countries would also be cut off.
Analysts at Gavekal, a financial research firm, said that if Gazprom also stopped deliveries to Germany, “the economic consequences would be catastrophic”.
Meanwhile, in Italy, central bank estimates point to a recession this year if Russia is already… energy supply to the southern nation.
As a whole, the EU receives about 40% of its gas imports from Russia. Reduced flows can hit households hard, as well as businesses that depend on the raw material to produce their goods.
Alfred Stern, CEO of one of Europe’s largest energy companies, OMV, told CNBC on Friday that it would be nearly impossible for the EU to find alternatives to Russian gas in the short term.
“We have to be pretty clear: in the short term it will be very difficult, if not impossible for Europe to replace Russian gas flows. So this could be a medium to long term debate… but in the short term “I think we need to stay focused and make sure we also supply European industry and European households with gas,” Stern said.
Separate data, also released on Friday, pointed to a euro area GDP (gross domestic product) of 0.2% in the first quarter.
“Of the Member States for which data is available for the first quarter of 2022, Portugal (+2.6%) recorded the largest increase compared to the previous quarter, followed by Austria (+2.5%) and Latvia (+2, 1%), recorded in Sweden (-0.4%) and in Italy (-0.2%),’ the release said.
Analysts at Capital Economics said that despite the positive first quarter figure, “we believe the eurozone’s GDP is likely to contract in the second quarter as the effects of the war in Ukraine and rising energy prices take an increasing toll on real household income and consumer confidence.” as aggravating the problems on the supply side.”
Market players are paying close attention to how the ECB might react, with some predicting its first rate hike as early as this summer. In a note dated Friday, Bank of America said the ECB will raise interest rates four times this year and two more times in 2023.