Eurozone inflation remains well above the ECB’s target as energy and food prices soar.
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Eurozone inflation has hit a record high for the sixth straight month, raising further questions about how the European Central Bank will respond.
Headline inflation in the 19-strong region hit 7.5% in April, according to preliminary estimates from European Statistics Office released on Friday. In March, the figure was 7.4%.
European Central Bank Vice President Luis de Guindos on Thursday tried to reassure lawmakers in the face of soaring prices by saying the euro zone was near the peak of inflation. The central bank expects price pressures to ease in the second half of this year, although energy costs are expected to keep inflation relatively high.
The latest reading of inflation comes amid concerns about the ongoing war in Ukraine and the resulting impact on Europe’s energy supplies – and how that could affect the region’s economy.
Rising energy prices were the main contributor to inflation in April, although slightly lower than the previous month. Energy prices rose 38% on an annualized basis in April, compared to a 44.4% rise in March.
Earlier this week, the Russian energy company Gazprom stopped gas deliveries to two EU countries because they had not paid for the raw material in rubles. The move sparked fears that other countries could also be cut off.
Analysts at financial research firm Gavekal said that if Gazprom also cut supplies to Germany “it would be disastrous for the economy.”
Meanwhile, central bank estimates in Italy point to a recession this year if Russia cuts all of its funds Energy supply of the southern nation.
Overall, the EU gets about 40% of its gas imports from Russia. Reduced flows could hit homes hard, as well as businesses that rely on the commodity to manufacture their goods.
Speaking to CNBC on Friday, Alfred Stern, CEO of one of Europe’s largest energy companies, OMV, said it was nearly impossible for the EU to find alternatives to Russian gas in the short term.
“We should be pretty clear: in the short term, it will be very difficult, if not impossible, for Europe to replace Russian gas flows. So this may be a mid- to long-term debate… but in the short-term “I think we need to stay focused and make sure we’re also delivering gas to European industry and European households,” Stern said.
ECB hikes
Separate data, also released on Friday, pointed to a GDP (gross domestic product) rate of 0.2% for the euro zone in the first quarter.
“Among the Member States for which data are available for the first quarter of 2022, Portugal (+2.6%) recorded the highest quarter-on-quarter increase, followed by Austria (+2.5%) and Latvia (+2.1%) . in Sweden (-0.4%) and in Italy (-0.2%),” reads the press release.
Analysts at Capital Economics said that despite the upbeat first-quarter numbers, “we believe euro-zone GDP is likely to contract in the second quarter as the aftermath of the Ukraine war and rising energy prices take an increasing toll on real household and household incomes consumer confidence than exacerbating supply-side problems.”
Market participants are watching carefully how the ECB might react, with some forecasting its first rate hike as early as this summer. In a note on Friday, Bank of America said the ECB would hike rates four times this year and twice more in 2023.