Inflation in the euro zone remains well-above the ECB’s target, as energy and food prices soar.
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Inflation in the euro zone has hit a record high for the sixth consecutive month, sparking further questions over how the European Central Bank will react.
Headline inflation in the 19-member region reached 7.5% in April, according to preliminary estimates by Europe’s statistics office released Friday. In March, the figure came in at 7.4%.
European Central Bank Vice President Luis de Guindos tried to reassure lawmakers over rising prices on Thursday, saying the euro zone is close to reaching peak inflation. The central bank sees price pressures diminishing in the second half of this year, although energy costs are expected to keep inflation relatively high.
The latest inflation reading comes amid concerns over the ongoing war in Ukraine war and subsequent impact on Europe’s energy supply — and how this could affect the region’s economy.
Rising energy prices contributed the most to April’s inflation rate, though they were slightly lower than the previous month. Energy prices were up 38% in April on an annual basis, compared to a 44.4% rise in March.
Earlier this week, Russia’s energy firm Gazprom halted gas flows to two EU nations for not paying for the commodity in rubles. The move sparked fears that other countries may also be cut off.
Analysts at Gavekal, a financial research firm, said that if Gazprom were to also cut supplies to Germany, “the economic effects would be catastrophic.”
Meanwhile in Italy, central bank estimates are pointing to a recession this year if Russia cuts all its energy supplies to the southern nation.
As a whole, the EU receives about 40% of its gas imports from Russia. Reduced flows could hit households hard, as well as companies that depend on the commodity to produce their goods.
Speaking to CNBC Friday, Alfred Stern, CEO of one of Europe’s largest energy firms, OMV, said it would be almost impossible for the EU to find alternatives to Russian gas in the short-term.
“We should be rather clear: in the short run, it will be very difficult for Europe, if not impossible, to substitute the Russian gas flows. So, this can be a medium-to-long term debate … but in the short run, I think we need to stay focused and make sure that we keep also European industry, European households supplied with gas,” Stern said.
ECB hikes
Separate data also released Friday pointed to a GDP (gross domestic product) rate of 0.2% for the euro area in the first quarter.
“Among the Member States for which data are available for the first quarter 2022, Portugal (+2.6%) recorded the highest increase compared to the previous quarter, followed by Austria (+2.5%) and Latvia (+2.1%). Declines were recorded in Sweden (-0.4%) and in Italy (-0.2%),” the release said.
Analysts at Capital Economics said that despite the positive figure for the first quarter, “we think euro zone GDP is likely to contract in Q2 as fallout from the Ukraine war and surging energy prices take an increasing toll on households real incomes and consumer confidence as well as exacerbating supply-side problems.”
Market players are carefully watching out for how the ECB might react, with some projecting its first rate hike as early as this summer. In a note Friday, Bank of America said the ECB will hike rates four times this year and another two times in 2023.