Inflation in the euro area raises fears .. unprecedented levels in 13 years

Eurozone inflation accelerated more than expected to its highest level in 13 years, adding to the debate over how long it will continue to rise after the crisis.

Consumer prices increased 3.4% in September, compared to estimates of 3.3%, according to figures released by Eurostat on Friday. A rate excluding volatile components such as food and energy jumped to 1.9%, a level not seen since 2008.

Price growth is primarily driven by the effects associated with the pandemic and the reopening of economies after extended periods of virus-induced shutdown. The European Central Bank expects it to peak later this year, before a slowdown occurs in 2022.

However, supply chain bottlenecks in manufacturing are already going on for longer than many initially expected, and surveys show that companies are increasingly trying to pass on costs to customers to protect profit margins.

On the other hand, the deep energy crisis is adding to the pressure. Energy prices rose by 1.3% in September and increased by more than 17% over the previous year. Prices of industrial non-energy goods rose 2.3% compared to August.

European Central Bank President Christine Lagarde reiterated this week that she considers the current rally “largely temporary”, warning against overreaction and premature tightening of monetary policy. Some of her colleagues have expressed concerns that the official forecast will prove too low, although most still expect price growth to slow eventually.

On Thursday, German figures showed that the inflation rate reached 4.1%, the highest in nearly three decades. While this is primarily driven by statistical effects, the Bundesbank sees the rate remaining above the ECB’s 2% target until the middle of next year.

The main factor that could maintain such high rates for a longer period is the increase in wages which in turn risks inducing further price increases. This is something the ECB should be aware of and ready to respond to if it happens, Central Bank of Ireland Governor Gabriel Makhlouf said on Bloomberg TV this week.

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