A startling new jump in consumer prices in Europe signals that inflation has more stubbornly burrowed its way across the continent despite slowing growth, complicating policymakers’ efforts to steer economies through a difficult winter and possible recession.
Consumer prices in the 19 countries that use the euro as their currency rose at a record annual rate of 10.7 percent in October, the European Commission reported on Monday. In September, the rate was 9.9 percent. Twelve months ago, it was 4.1 percent.
The relentless upward march sharpens the tough choices facing Europe’s elected leaders and central bankers. Reiterating its determination to halt the rise in prices, the European Central Bank last week announced it was raising interest rates by three-quarters of a percentage point for the second time in a row. Until September, the bank had not instituted such a big increase since 1999, in the very early days of the eurozone.
But there are growing concerns that efforts to corral inflation by making borrowing and mortgages more expensive will accelerate countries’ slide into recession, choking off investment and increasing unemployment.
As the International Monetary Fund recently warned: “European policymakers face severe trade-offs and tough policy choices as they address a toxic mix of weak growth and high inflation that could worsen.”
Although the commission reported that output grew by 0.2 percent over the quarter that spanned July, August and September — a higher-than-expected rate — many economists agreed that a recession in Europe is all but inevitable. Several said on Monday that they expected growth in the final three months of the year to deteriorate.
The problem of bringing inflation to heel without causing the economy to plunge in a downward spiral is particularly pointed for the European Central Bank.
When Christine Lagarde, the bank’s president, announced last week’s interest rate increase, she implied that the bank’s aggressive stance might ease. The elevated inflation levels now, though, are likely to encourage stronger pushback from members of the council who remain hawkish about the inflation fight.
“I expect this to reinforce the division inside the European Central Bank’s governing council,” Lucrezia Reichlin, an economics professor at the London Business School, said of this latest report from Eurostat, the commission’s statistical office.
The combination of higher-than-expected inflation and output, she said, suggests that supply shortages are not the sole problem; increasing demand from consumers is also contributing to rising prices.
Painfully high energy and food prices continued to push inflation to record levels. Over the past 12 months, energy prices rose by 41.9 percent while food prices increased by 13.1 percent. With Russia’s withdrawal from an agreement that allowed grain exports from Ukraine, grain prices are likely to go up even more.
Further worrisome are signs that inflation is broadening its reach to other sectors.
More than half of the eurozone countries recorded double-digit inflation rates in the year through October, including Germany (11.6 percent); the Netherlands (16.8 percent); Italy (12.8 percent) and Slovakia (14.5 percent). In the Baltic countries, rates spilled past 21 percent. France showed the lowest rate of 7.1 percent.
Consumer spending in part drove Germany, Europe’s largest economy, to a 0.3 percent annual growth rate during the third quarter. Italy’s economy grew by 0.5 percent, and Sweden’s by 0.7 percent. Overall output slowed from the 0.8 percent recorded over the prior three-month period. Elsewhere, growth slowed in the third quarter: Output in France and Spain each increased by just 0.2 percent, while the economies of Austria and Belgium shrank by 0.1 percent.
In the larger bloc of 27 countries that make up the European Union, third-quarter growth increased by 0.2 percent, the same as in the eurozone.
In the United States, consumer prices rose by 8.2 percent in the year through September. Britain’s inflation rate was 10.1 percent over the same period.
The International Monetary Fund has urged central bankers to stay the course possibly through next year. It noted that “almost half the recent surge in European core inflation remains unexplained by its usual drivers,” suggesting that the war in Ukraine and aftershocks of the coronavirus pandemic were contributing to a new inflationary dynamic.
Most central bankers remain resolute. The Federal Reserve is expected to raise interest rates by three-quarters of a percentage point when policymakers meet on Wednesday. It would be the sixth increase this year. The Bank of England, which meets on Thursday, is also expected to raise rates by the same amount.
The sting from the Fed’s interest rate increases is acutely felt in regions around the world. Higher interest rates attract investors, which pushes up the value of the dollar. For emerging nations with big bills for loans borrowed in dollars, though, their already heavy burden grows even larger. At the same time, countries that must import American goods or essentials like energy and food that are often priced in dollars are seeing them get much more expensive. They become poorer.
While most economists have urged a hard line on inflation, there are an increasing number of voices questioning whether central bankers are going too far, too fast. Higher interest rates will not suddenly increase the supply of oil, wheat and microchips, and may even exacerbate shortages by stunting investment.
Output for July, August and September dropped by 0.6 percent from the 0.8 percent tallied during the previous three months.
Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, wrote in a note on Monday that “the slowdown may have been even stronger than the headline suggests,” and added that growth was expected to decline in the last quarter as “higher interest rates discourage investment and still-high inflation leads consumers to tighten their belts over the winter.”