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New inflation record in Europe: the war drives up food prices | War in Ukraine

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The inflation rate in the 19 countries that share the single currency stood at 8.6% over one year in June, after 7.4% in April and 8.1% in May, Eurostat announced on Friday. These figures are the highest recorded by the European statistics office since the publication of this indicator began in January 1997.

Every month, record levels

Consumer price inflation has hit record highs every month since November 2021, even though last year it was seen as a temporary phenomenon linked to the strength of the economic recovery from the pandemic shock and disruptions to supply chains.

The invasion of Ukraine by the Russian army at the end of February and the Western economic sanctions against Moscow are exacerbating the surge in prices and raising fears of a sharp fall in the growth of gross domestic product (GDP).

From now on, Europeans are struggling to feed themselvesunderlines Philippe Waechter, chief economist for Ostrum Asset Management.

Historically, we have never had such a high figure on the contribution of food, it will weigh very heavilyhe explained to AFP, referring to the increase in the price of cereals and oils used in processed products.

The strengthening of inflation always first affects the energy sector (electricity, oil, gas, etc.). This component of the price index jumped 41.9% year on year in June after 39.1% in May.

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However, the increase in food prices (including alcohol and tobacco) also accelerated to 8.9%, against 7.5% in May.

Mr. Waechter is worried about a major risk for the economy with households forced to tighten their belts.

At some point, the consumer is forced to arbitrate: he needs his gas to go to work and cuts in other expenses, which creates a negative shock for the activity [économique]. »

A quote from Philippe Waechter, chief economist at Ostrum Asset Management

In May, Brussels lowered its gross domestic product (GDP) growth forecast for the euro zone by 1.3 points in 2022, to 2.7%, and raised its inflation forecast by 3.5 points, to 6.1%, compared to the figures announced on February 10, before the start of the Russian offensive.

The situation could get even worse if Moscow decides to completely cut off the gas tap to Europe in response to Western sanctions.

The outlook for the rest of the year is bleakwarns Pushpin Singh, economist for the CEBR research center.

Current gas shortages, caused by reduced Russian exports, have led Germany and the Netherlands to activate their emergency plans to limit consumption [d’énergie]. In the event of a supply disruption, cuts will be imposed on industry and cause a drop in manufacturing output. »

A quote from Pushpin Singh, Economist for CEBR Research Center

Inflation in the euro zone is well above the objective of a level close to 2% set by the European Central Bank (ECB). The institution is therefore preparing in July to raise its interest rates for the first time in eleven years, at the risk of further slowing growth.

This prospect has resurrected the risk of a debt crisis in the euro zone with growing gaps between the interest rates charged to the states of northern and southern Europe to borrow and to finance their deficits.

The ECB will go as far as necessary to fight against inflation, which should remain excessively high for some time to comewarned Tuesday the president of the institution, Christine Lagarde.

France is relatively less affected than its European neighbors with 6.5% inflation in June, the second lowest rate in the euro zone behind Malta (6.1%), according to the consumer price index (HICP) calculated by Eurostat.

Inflation reached 8.2% in Germany. The highest rates are recorded in the Baltic States: 22% in Estonia, 20.5% in Lithuania and 19% in Latvia, countries bordering Russia, particularly exposed to the severance of commercial ties with Moscow.

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