EU inflation surges to 30-yr high as ECB plans less bond-buying

Amid a record 4.9 percent surge of annual consumer inflation in 19 EU countries last month, the European Central Bank (ECB) has declared plans to scale back its crisis bond-buying but ruled out raising interest rates next year.

The announcement, which contradicts a more aggressive withdrawal of crisis support by the US Federal Reserve and Bank of England this week, led to a slump in eurozone bond markets on Thursday as investors absorbed the ECB’s scheme to sharply reduce its bond purchases in 2022.

ECB President Christine Lagarde said the eurozone economy had recovered enough to allow a “step-by-step reduction in the pace of asset purchases,” but noted that “monetary accommodation is still needed for inflation to stabilize at our 2 percent inflation target over the medium term.”

With some investors reacting to the news by accusing the ECB of allowing inflation to run out of control, however, the European statistics agency Eurostat said its early flash reading of inflation in November had reached the highest level since relevant records began in 1997, two years before the euro was launched.

The sharp hike marked a giant upsurge from last year, when Europe recorded a deflation of 0.3 percent. A price increase of such scale was last recorded in the EU in July 1991.

High gas prices and the cost of imported goods were blamed for the inflationary surge. Energy prices -- including oil and gas -- jumped 27 percent from November 2020, according to Eurostat figures, to increase the headline rate from 4.1 percent in October.

According to local press reports, just in November, consumer prices in the euro area climbed by 0.4 percent.

Core annual inflation -- which excludes volatile costs on energy and unprocessed food -- also surged to 2.6 percent from 2 percent in the previous month.

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Experts say that higher energy prices and persisting supply chain disruptions are the key drivers of the price surge, having significantly slowed the EU’s post-pandemic economic recovery.

Until recently, press reports add, Lagarde -- like most central bank governors – had insisted that inflationary pressures would prove to be temporary and would probably start to wane in 2022, though other economists have discounted that notion as “wishful thinking.”

Some analysts further explained that the strength of rising core prices above the ECB’s 2-percent target showed the headline inflation rate was already having secondary effects through higher wage demands.

However, ECB authorities are expected to take a more cautious view, holding back from announcing any big policy changes while tests are carried out on the effects of Omicron.

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