By Balazs Koanyi, Philip Blenkinsop

FRANKFURT/BRUSSELS – Eurozone inflation surpassed expectations to reach its highest point. This creates a dilemma for the European Central Bank. It has always underestimated the economic stress caused by COVID-19 lockdowns being lifted.

While growth has skyrocketed as people return to shops and other venues, many businesses are unable to meet demand. This puts pressure on prices that have already risen due to rising commodity costs.

From 3.4% in September, inflation in the 19 Euro-member countries rose to 4.1% in October. This was higher than the consensus forecast of 3.7%. This reading surpasses 2008’s record and is equal to the 1997 all-time high for time series.

Inflation was mainly driven by rising energy prices and tax increases, but growing supply pressures led to higher prices for industrial goods and services, Eurostat data showed Friday.

In terms of growth, the economic boom was evident.

Comparing to the same period last year, it grew 2.2% in its third quarter. It was also at its fastest pace for a whole year. Also, expectations were far exceeded as more businesses have reopened. Now, it is on track to reach its pre-crisis level before the year ends.

This was despite Germany being the biggest economy of the bloc and having a difficult time with its large car manufacturing sector due to a lack of chip supply.

Growth is considered healthy if the economy recovers ground from the pandemic. However, inflation is likely to cause concern among ECB policymakers.

Inflation is now at 4.1%. This is more than double the ECB target. It is expected to increase further over the next months, before a slower retreat next year due to some technical drivers that are removed from year-earlier figures.

While energy prices accounted the largest portion of inflation, underlying costs were above 2%. This is something that ECB policy hawks might use to suggest it’s time to reduce extraordinary stimuli.

Inflation will fall more slowly than the ECB thinks. There is a risk that higher prices may become permanent in wage and pricing structure.

Christine Lagarde, President of the ECB, was more careful about inflation Thursday. She warned that disruptions to supply would continue longer than originally thought. This will keep consumer prices higher and put pressure on wages.

She insisted, however that inflation would fall below the ECB target over the medium-term so there is no need for a policy response right now.

Inflation concerns are compounded by Friday’s ECB Survey, in which over 30% of respondents predicted that supply shortages and increased input costs would last another year. The percentage that predicted difficulty would continue for six to twelve months was slightly lower.

Also, firms reported a shortage of candidates for jobs due to people changing their professions, countries or lifestyles. This was most likely to lead in wage hikes.