FRANKFURT, (Reuters) – Inflation in the Euro zone jumped to 7.5% March. This is a record-breaking high, with many months before its peak. It makes grim readings for the European Central Bank which must reconcile skyrocketing prices and vanishing economic growth.

Eurostat reported Friday that consumer price growth increased by 5.9% from February to 19.9%. This was far above expectations of 6.6%.

Although energy was the primary culprit, the inflation of food prices, services, and durable goods all passed the ECB’s 2% goal. It is further evidence that rising price levels are not just a function of oil.

The risk of high inflation becoming a permanent phenomenon is also increased by the acceleration in underlying prices. These prices filter out volatile food and energy prices.

The ECB is closely monitoring inflation. Food and fuel prices were at 3.2%, while the narrower measure which includes alcohol and tobacco was 3.0%, up from 2.9%.

The ECB is now faced with a challenging policy dilemma.

The main goal of this policy is to bring inflation down to 2%. However, tightening now could lead to the collapse of an already fragile economy due to the effects of COVID-19 and wars in neighboring countries.

The ECB believes that the growth rate in the first quarter of 2008 was slightly positive. However, second quarter growth is expected to be very low due to high energy costs, which will reduce consumption and affect investment.

It would be a sign that the bloc is close to stagflation. This is when rapid inflation comes with stagnating economic growth.

High energy costs are normally a hindrance to growth. They will therefore weigh down inflation after the spike, increasing the chance that prices will fall below their target.

The ECB cannot ignore the high rate of inflation. It says that the peak will be three to four more months away.

As the eurozone’s labor market has become more tight than ever in recent decades, wage inflation is already in process. This is a prerequisite for durable consumer inflation. The ECB’s inaction could also increase inflation expectations and make price growth more durable.

The credibility of the ECB is at stake because it has consistently underestimated the price growth over the last year.

It is likely that the bank will agree to tighten monetary policies this year but only in small increments.

Although markets are pricing in an increase of 63 basis point by year’s end, policymakers remain more cautious and do not expect to make such drastic moves.

There is a chance that the ECB could be surprised by big inflation and tighten its stance faster. This would force it to catch up with the market later.