Eurozone inflation hits record high of 8.9% as energy prices soar | Eurozone

Inflation in the Eurozone hit a record high of 8.9% this month, closing the gap with the UK’s rate of 9.4%.

More expensive energy was blamed for the lion’s share of the 8.6% rise in June, as the fallout from Russia’s invasion of Ukraine continues to hammer European economies.

The intensification of the cost of living crisis across the continent, illustrated by a flash estimate, came as the eurozone economy grew at a much faster pace than expected over the past three months.

Beating forecasts of a 0.2% increase in the second quarter, the 19-member currency bloc recorded GDP growth of 0.7%, led by France, Italy and Spain.

However, analysts said the recent rally was likely to evaporate as higher prices, reduced Russian gas flows and supply chain issues caused a mild recession in the second half, following a slowdown already affecting the United States.

Growth of Eurozone economies in Q2 2022

France, Italy and Spain, which are credited with partially controlling domestic energy costs to minimize the impact of the cost of living squeeze, saw the strongest growth. They have also benefited from a return of tourism and the reopening of businesses after the pandemic closures.

France rebounded from its contraction of 0.2% in the first quarter to growth of 0.5% in the latest period, while Italy rose by 1% and Spain by 1.1%. In Germany, where manufacturing has been hit by soaring energy prices and weak Chinese demand, growth has stagnated.

Azad Zangana, senior European economist at Schroders, said the disappointment in Germany was understandable, but “it should be noted that German GDP growth for the first quarter has been revised up from 0.2% to 0.8 %, with an underperformance compared to previous data. therefore not being as bad as it seems”.

Bert Colijn, senior eurozone economist at ING, said record inflation could prompt the European Central Bank (ECB) to raise interest rates again significantly in September.

“Food and core inflation continues to rise while the gas crisis keeps energy inflation high. Supply, rather than demand, remains the main driver of rising inflation,” Colijn added.

He said the Frankfurt-based central bank could add to the 0.5 percentage point hike earlier this month with a similar hike at its next meeting in September.

Hussain Mehdi, macro and investment strategist at HSBC Asset Management, said: Another upward inflation surprise will make the reading uncomfortable in Frankfurt and exacerbate the squeeze on household incomes.

“Underlying price pressures emanate from a strong labor market, while further gas supply disruptions pose significant upside risks going forward,” he said.

“This will keep the ECB on a hawkish trajectory this year, even in the face of a likely recession.”

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