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Euro zone inflation jumps to 13-year high, worsening ECB headache By Reuters

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© Reuters. FILEPHOTO: This is a man shopping at an open-air supermarket in Rome, Italy. The government will announce tighter coronavirus (COVID-19,) restrictions on March 12th, 2021. REUTERS/Yara Nardi

FRANKFURT, (Reuters) – The Euro zone’s inflation reached a thirteen-year peak last month. It looks like it will rise further. This would cloud the European Central Bank’s positive view of the largest price increase since the global financial crisis.

The consumer price inflation rate in 19 euro-zone countries increased to 3.4% in September, compared with 3% one month prior. This is the highest level since September 2008. Analysts had expected 3.3%.

The main reason prices rose was a rise in energy costs. This is mainly due to a reverse of the oil price crash during the COVID-19 Pandemic. However, the effects from shipping and production bottlenecks were also evident as durable goods prices increased 2.3% from August.

Inflation could rise to 4% this year due to rising prices and production bottlenecks affecting everything, including computer manufacturing. This is twice the ECB target. However, the bank predicts a decline that will occur in the early 2022.

However, supply chain disruptions seem to be worsening. This raises the possibility that inflation hump seeps into the underlying prices. Firms adjust their pricing and wages policies in order to create more permanent pressures.

The ECB will continue to tell us that the current bout of inflation is temporary and prices will return to normal soon. This will allow for continued price growth, which will require depressed borrowing costs.

Christine Lagarde (ECB President) struck a calmer tone.

In the meantime, market economists have begun to shift their opinions and argue that central banks might be overestimating inflation risk.

BNP Paribas’ economist Luigi Speranza indicated that he believes there is a high chance this inflation could be more transitory than any central banks (including the ECB) suggest.

Consumers may demand higher wages, and corporations might be willing to accommodate them on the grounds that they can pass higher costs on through higher final prices.

In September, underling prices, which are closely monitored by policymakers to filter volatile food and fuel prices out, also increased.

The core inflation, which excludes food and energy, rose 1.9% to 1.6%. A narrower measure also excluded alcohol and tobacco.

ECB policymakers will likely be cautious, despite being increasingly concerned about inflation after the bank has missed its goal for almost a decade.

The government has stated that it will temporarily overshoot to make sure inflation remains on target. This is because fighting low price growth requires unprecedented efforts, which include extremely negative interest rates, trillions of euro of asset purchases, and the purchase of billions in assets.

Nonetheless, with the pandemic crisis stimulus package of 1.85 trillion euros due to end next March, a slight ECB tightening in the months ahead is possible.

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