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Price rises across the eurozone have reached their highest level in 13 years, but they should start to ease in the second half of the year.
According to foreign media, the Telegraph reports, the sharp rise in inflation – which indicates an increase in the price of goods and services that households buy – has grabbed headlines around the world, causing concern as January set a new record.
Consumer prices in the eurozone rose by a record 5.1 percent last month, according to the latest data from the European Central Bank (ECB), challenging expectations of a slowdown.
But what are the reasons behind this and what can be done to slow it down?
What are the causes?
High prices were driven mainly by rising energy tariffs and secondly by food.
Energy prices in the Eurozone were 28.6 percent higher in January than in the same month last year, a record increase, while the increase in the cost of raw food accelerated to 5.2 percent.
The price of services continued to rise by 2.4 percent, while the rise in commodity prices slowed to 2.3 percent.
The pandemic-related changes make up mainly these increases.
European economies slowly reopened in 2021 as more and more restrictive measures were lifted. People started traveling again and going to restaurants, thus buying more, spending some of the money they did not spend during isolation.
But logistics are not moving at the same pace.
Companies find it difficult to keep up with the rapidly growing demand as they rebuild supply chains that were badly hit by the pandemic.
Challenges, such as the lack of transport containers, mean that freight transport has become more difficult and more expensive. The longer these difficulties persist, the more likely it is that companies will pass these costs on to their customers in the form of higher prices.
Oil, gas and electricity have also become more expensive worldwide, reports EuroNews, reports Telegrafi.
Energy prices rose as oil and gas production lagged behind a return to consumer demand from the pandemic.
According to the ECB, because a large part of the costs of companies and people are related to energy, the price of oil, gas and electricity is very important for headline inflation: half of the recent rise in inflation was due to prices higher energy.
How long can it last?
The European Commission said Thursday that inflationary pressures are likely to ease next year.
“After reaching a record rate of 4.6 percent in the fourth quarter of last year, inflation in the eurozone is projected to peak at 4.8 percent in the first quarter of 2022 and remain above 3 percent until the third quarter of the year “, it is said in a statement of the Commission.
“As pressures from supply constraints and high energy prices ease, inflation is expected to fall to 2.1 percent in the last quarter of the year, before moving below the 2 percent target of the European Central Bank throughout 2023.” it is said further.
But uncertainty remains high as the overall European economic outlook depends on geopolitical tensions between Ukraine and Russia, but also on the evolution of the pandemic worldwide.
Thomas Wieser, an Austrian-American economist who served as President of the Eurogroup Working Group during the difficult years of the financial crisis, explained to Euronews that it is really difficult to predict when inflation will actually fall below the ECB target.
“We do not know. Our situation is better than in the UK or the US, where especially the sources of inflation in the US are partly different from those we have in the euro area, especially because the fiscal stimulus at the head of an already strong growing economy was “much, much higher there than in Europe,” he said.
“Secondly, we do not have any information on when the supply chain problems will start to be solved. “There is reason to hope that in the second half of the year, this will be much better.”
“And third, the rebalancing of demand for goods and services in our economy will only begin to increase once the vast majority of restrictions, including travel restrictions, have been lifted. “Again, we can be optimistic about the second half of the year, but no one knows.”
What can be done to stop rising inflation?
Earlier this month, ECB President Christine Lagarde said she could not clearly rule out an interest rate hike later in 2022 because she said a March 10 meeting would be crucial in deciding how much the central bank would soon end its long-term bond-buying program as a pandemic crisis supporting the economy.
“If inflation were to continue, I think there was reason for the stimulus to pull back quite quickly in the course of 2022,” Wieser told Euronews. “Inflation is bad for those who are frugal. “Inflation is bad for those who have a fixed or fairly stable nominal income, and that includes a lot of people in their pension benefit plans, and therefore a high inflation rate is always bad.”
But while the poorest families are hardest hit, Guntram Wolff, director of the Brussels-based Bruegel think tank, told Euronews that bolder measures are needed by policymakers.
“What policymakers can do is, of course, provide support for these families. “I would say that support should not be a reduction in the value-added tax on energy, but a direct transfer so that they have more purchasing power,” said Wolff.
“But we still want the price signal to work, so we want households, in a sense, to try to be aware of their energy consumption and react to the price signal. “But I think transfers are needed for poor families.”
While experts are monitoring the situation across Europe and the world, it is quite clear that since the pandemic has not affected all countries equally, this is also the case with inflation.
And the debate over how to move forward in the post-pandemic era will not be easy and has started with a shadow of the geopolitical and financial threats circulating.
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