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  • Writer's pictureanalysiswatch

Title: Euro zone inflation hits yet another record high after big jump

Jul 29, 2022 05:05AM ET

By: AnalysisWatch

Eurozone inflation rose to another record high in July, and its peak may still be months away, keeping pressure on the European Central Bank to opt for another big interest rate hike in September.

Consumer price growth in the 19-nation eurozone accelerated to 8.9% in July from 8.6% a month earlier, well above expectations of 8.6% and far from the ECB's 2% target, data from Eurostat, the EU's statistics agency, showed Friday.

Inflation was initially driven by supply bottlenecks following the pandemic, but more recently, the main culprit has been the effects of Russia's war in Ukraine, which has pushed up energy, metals, and food prices.

While high energy prices remain a major inflationary factor, prices for processed food and services have also risen sharply, suggesting that inflation is becoming more widespread.

Concerned that price increases are spiraling out of control, the ECB raised interest rates by 50 basis points this month, violating its own guidelines for less movement, and promised further increases to prevent the emergence of a wage-price spiral that is difficult to break.

But inflation is also a dilemma for the bank. Skyrocketing food and energy costs are depleting savings and ultimately slowing growth, at worst, pushing the bloc into recession.

Indeed, Germany, the eurozone's largest economy, stagnated in the second quarter before what could be a tough third quarter.

Meanwhile, the U.S. economy unexpectedly contracted in the second quarter.

Still, the ECB has hinted that inflation concerns are more important than growth concerns, suggesting that policymakers are willing to raise rates even if it hurts growth, as inflation is now at risk of being embedded.

Core inflation, which excludes volatile food and fuel prices, rose to 5.0% from 4.6%, more than double the ECB's 2% target. An even narrower measure, which excludes alcohol and tobacco, rose to 4.0% from 3.7%.

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