The latest data from Eurostat, the statistical office of the European Union, showed that inflation in the euro area stayed at a record high of 5.3% in August, unchanged from July. However, the core measure of inflation, which excludes volatile food and energy prices, declined to 5.3% from 5.5% in the previous month.
Inflation pressures persist despite slowdown in economic activity
The high level of inflation in the euro area reflects the persistent pressures from rising energy and commodity prices, supply chain disruptions, and labor shortages. These factors have pushed up the costs of production and transportation for many businesses, which have passed on some of the increases to consumers.
Energy prices rose by 18.9% year-on-year in August, slightly lower than the 19.4% increase in July. Food, alcohol and tobacco prices increased by 2.6%, down from 3.6% in July. Services prices rose by 2.8%, also lower than the 3% increase in July.
However, non-energy industrial goods prices accelerated to 4.1% in August, up from 3.7% in July. This category includes items such as clothing, furniture, cars, and electronics, which have been affected by global shortages of raw materials and semiconductors.
The high inflation rate poses a challenge for the European Central Bank (ECB), which aims to keep inflation below but close to 2% over the medium term. The ECB has maintained an accommodative monetary policy stance, arguing that the inflation spike is temporary and will fade as the pandemic-related shocks subside.
However, some ECB policymakers have expressed concerns that inflation could become more persistent and affect inflation expectations, which could warrant a reduction of the stimulus measures. The ECB will hold its next monetary policy meeting on September 9, where it will update its economic projections and discuss its policy options.
Eurozone economy loses momentum amid Delta variant spread
The high inflation rate comes at a time when the eurozone economy is losing momentum amid the spread of the Delta variant of the coronavirus, which has led to renewed restrictions and uncertainty in some countries.
According to the preliminary data from IHS Markit, the eurozone composite purchasing managers’ index (PMI), a measure of business activity across the manufacturing and services sectors, fell to 51.1 in August from 53.2 in July, indicating a slower pace of expansion.
The services PMI dropped to 48.3 from 50.9, signaling a contraction for the first time this year. The manufacturing PMI improved slightly to 43.7 from 42.7, but remained well below the 50 level that separates growth from contraction.
The PMI data showed that output growth slowed in all four largest eurozone economies: Germany, France, Italy, and Spain. The survey also revealed that business confidence fell to its lowest level since February, as firms faced rising costs, supply bottlenecks, labor shortages, and weaker demand.
The slowdown in economic activity could weigh on the eurozone’s recovery from the pandemic-induced recession last year, when the bloc’s gross domestic product (GDP) contracted by 6.6%. In the second quarter of this year, the eurozone GDP grew by 2% quarter-on-quarter and 13.7% year-on-year, rebounding from a 0.3% contraction in the first quarter.
The European Commission expects the eurozone GDP to grow by 4.8% this year and 4.5% next year, but these forecasts are subject to downside risks from the evolution of the pandemic and its impact on consumer and business confidence.
