Eurozone inflation at 4.1 per cent is highest since 2008

Eurozone annual inflation equalled its all-time high of 4.1 per cent in October, as economic growth beat expectations in the third quarter to approach pre-pandemic levels.

Inflation in the 19 countries sharing the euro was up 0.7 per cent on the 3.4 per cent recorded a month earlier, according to Eurostat, beating a consensus forecast of 3.7 per cent with the reading equalling the all-time-high set in 2008.

The acceleration in prices came as the eurozone economy grew 2.2 per cent in the third quarter compared with a year earlier, its fastest pace in a year and well ahead of expectations, as businesses reopened. It is now set to hit its pre-crisis size before the end of the year.

Andrew Kenningham, chief Europe economist at Capital Economics, said the solid increase in eurozone gross domestic product means that the recovery phase is now almost complete in most of the eurozone with the economy only half a percentage point below its pre-pandemic level.

“This has been a remarkably full recovery from last year’s recession and means that long-term scarring from the pandemic has not been as large as many expected. That in turn should help to bring fiscal deficits down quite sharply,” he said.

But he said that "growth will be much slower in the final quarter as supply chain disruption, slowing global demand and some labour shortages hamper production".

The bottlenecks already appeared to be taking their toll on the eurozone's largest economy, Germany, which grew by just 1.8 per cent in the third quarter.

Growth has soared as consumers return to stores and venues but many businesses have been unable to keep up with demand, putting pressure on prices that are already being driven higher by the rising costs of commodities.

While inflation was mostly driven by higher energy prices and tax increases, growing price pressures from supply bottlenecks were also visible in rising prices for services and industrial goods.

While growth is seen as healthy as the economy makes up ground lost to the pandemic, the inflation figure is likely to raise concerns among European Central Bank policymakers.

Although energy prices accounted for the biggest chunk of inflation, underlying prices were also above 2 per cent.

“Recent moves in oil and gas prices pushed the energy inflation rate up to 23.5 per cent, its highest level since the eurozone was formed, while the core rate only rose from 1.9 per cent to 2.1 per cent,” said Jack Allen-Reynolds, senior Europe economist.

At 4.1 per cent, inflation is already more than twice the ECB's target and Mr Allen-Reynolds expects the reading to rise further in November and December, as recent increases in gas prices point to a further pick-up in energy.

ECB President Christine Lagarde adopted a more cautious tone on inflation on Thursday, saying that supply disruptions would last longer than previously thought, keeping consumer price growth higher for longer and putting pressure on wages.

But she said inflation will fade back below the ECB’s target next year, a view shared by Mr Allen-Reynolds.

“The increase in core inflation this year has mostly been due to base effects that will drop out in 2022. The two-year annualised core inflation rate, which adjusts for last year’s low base level of prices, was just 1.1 per cent in October,” he said.

However, risks to the upside include supply problems dragging on for longer than the expected six to 12 months.

An ECB survey on Friday indicated that more than 30 per cent of companies surveyed by the bank expected supply constraints and higher input costs to last for another year or longer. A slightly lower percentage of respondents predicted difficulties would last another six to 12 months.

“Even if this keeps inflation above 2 per cent in the second half of next year, we still suspect that the ECB would argue that high inflation is transitory,” Mr Allen-Reynolds said