New inflation record in Europe: war drives up food prices | War in Ukraine

Europe’s new inflation record: war drives food prices up | War in Ukraine

Carrefour supermarket in Langueux, western France.

The war in Ukraine and Western sanctions against Moscow propelled European inflation to a new high in June, bad news for households now struggling with soaring food prices in addition to energy.

The inflation rate in the 19 countries that share the single currency stands at 8.6% year on year, in June, after 7.4% in April and 8.1% in May, Eurostat announced on Friday. These figures are the highest recorded by the European statistics office since the publication of this indicator began in January 1997.

Consumer price inflation has hit record highs every month since November 2021, even though last year it was considered a temporary phenomenon linked to the strength of the economy. economic recovery from the shock of the pandemic and disruptions to supply chains.

The invasion of Ukraine by the Russian army in late February and Western economic sanctions against Moscow exacerbate the price spike and raise fears of a sharp drop in gross domestic product (GDP) growth .

Europeans are now struggling to feed themselves, underlines Philippe Waechter, chief economist for Ostrum Asset Management.

Historically, we have never had such a high figure on the contribution of food, it will weigh very heavily, he explained to AFP, referring to the increase in the price of cereals and oils used in processed products.

The strengthening of inflation always hits the energy sector first (electricity, oil, gas, etc.). This component of the price index jumped 41.9% year on year in June after 39.1% in May.

However, the increase in food prices ( including alcohol and tobacco) also accelerated to 8.9%, from 7.5% in May.

Mr Waechter worries about a major risk to the economy with households forced to tighten their belts.

“At some point, the consumer is forced to arbitrate: he needs his gas to go to work and cuts in other expenses, which creates a negative shock for the consumer. ;economic activity].

— Philippe Waechter, Chief Economist at Ostrum Asset Management

In May, Brussels lowered its gross domestic product (GDP) growth forecast for the eurozone in 2022 by 1.3 points to 2.7% and raised its inflation forecast by 3.5 points. , to 6.1%, compared to the figures announced on February 10, before the outbreak of the Russian offensive.

The situation could get even worse if Moscow decides to completely cut the gas tap to Europe to retaliate against Western sanctions.

The outlook for the rest of the year is bleak, warns Pushpin Singh, an economist for the CEBR research center.

“The current gas shortages, caused by reduced Russian exports, have led Germany and the Netherlands to activate their emergency plans to limit [energy] consumption. In the event of a supply disruption, cuts will be imposed on industry and cause a drop in manufacturing output.

— Pushpin Singh, Economist for CEBR Research Center

Eurozone inflation is well above target. x27;a level close to 2% set by the European Central Bank (ECB). The institution is therefore preparing in July to raise its interest rates for the first time in eleven years, at the risk of further slowing growth.

This prospect has resurrected the risk of a debt crisis in the eurozone with growing gaps between the interest rates charged to northern and southern European states to borrow and to finance their deficits.

The ECB will go as far as necessary to fight inflation, which is expected to remain excessively high for some time to come, the President of the ECB warned on Tuesday. the institution, Christine Lagarde.

France is relatively less affected than its European neighbors with 6.5% inflation in June, the second highest rate euro area behind Malta (6.1%), according to the Harmonized Index of Consumer Prices (HICP) calculated by Eurostat.

Inflation reached 8.2% in Germany. The highest rates are recorded in the Baltic States: 22% in Estonia, 20.5% in Lithuania and 19% in Latvia, countries bordering Russia, particularly exposed to the rupture of trade links with Moscow.

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