Eurozone inflation soars to fresh record of 9.1%

Eurozone inflation soars to fresh record of 9.1%, sparking predictions of more interest rate hikes as pressure to combat rising prices grows

Inflation in the eurozone has hit a new record high of 9.1 per cent, adding to the like-lihood of a big interest rate hike next week as pressure to combat rising prices grows.

The higher-than-expected ‘flash’ estimate for August from statistics agency Eurostat showed energy and food prices were again the main factors.

Inflation was up from 8.9 per cent in July and has never been as high since the single currency zone’s records began in 1997.

Record rise: Inflation in the eurozone has hit 9.1% – up from 8.9% in July and has never been as high since the single currency zone’s records began in 1997

The European Central Bank (ECB) and its president, Christine Lagarde, will hold its next rate-setting meeting on September 8.

It hiked rates by an unexpectedly sharp 0.5 percentage points in July in a bid to tame inflation and could now go even further with an increase of 0.75 points. 

The ECB’s benchmark rate is currently zero so that would still be low compared with the Bank of England’s 1.75 per cent and the US Federal Reserve’s 2.25 per cent-2.5 per cent window.

Like other central banks, though, policy- makers will have to weigh up the need to fight inflation alongside the risk that such a move could add to recession pressures.

Some big drivers of global inflation, such as food and energy prices, have ebbed recently but ‘specific European problems’ with supply remain, said Bert Colijn, ING’s senior economist for the eurozone.

Russia is choking off gas relied on notably by Germany, Europe’s biggest economy, while summer droughts have also taken their toll – reducing water levels in the Rhine, a key industrial artery.

Yet household demand, which can also be a factor contributing to inflation, looks weak as consumers struggle with falling real terms wages, Colijn added.

‘As the economy is slowing rapidly, and perhaps already contracting at this point, the question is how much the ECB needs to slam the brakes,’ he said.

Another half percentage point hike ‘seems to be a done deal’, with more hawkish ECB members pushing for more. 

‘The big question is how the ECB will respond after this, if indeed signs of economic distress become more apparent, and inflation remains highly driven by supply-side factors.’

Last week one ECB member, Isabel Schnabel, told a meeting of global central bankers in Wyoming that the ratcheting up of interest rates would have to continue ‘even if we enter a recession’.

The euro continued to hover close to parity against the US dollar, edging 0.15 cents higher to $1.0031, while it also made headway versus the pound, which slipped by 0.45 euro cents to €1.1596.

Overall, eurozone inflation has still not matched the levels seen in the UK, where it hit 10.1 per cent in July.

But it varies widely between countries in the common currency area, from 6.5 per cent in France and 8.8  per cent in Germany to 10.5 per cent in Belgium, 13.6 per cent in the Netherlands, and more than 20 per cent in Estonia, Latvia and Lithuania.