The Rise of the Eurozone Inflation – does it reflect the enhanced instability of the economic systems?

According to the survey of Eurostat, the statistical office of the European Union, the annual inflation rate in the countries that use the euro currency jumped to a 10-year high of 3%.

As a result of the fuel price rise, inflation in the eurozone had already increased in July to 2.2%, after 1.9% in June.

In August, the energy sector recorded the highest annual increase, at 15.4%, far ahead of industrial goods excluding energy (2.7%), food, alcohol and tobacco (2%), and services (1.1%).

Among the larger countries in the eurozone, Germany experienced particularly high inflation as did Spain in August. Italy and France remained below the average.

In Germany, the rise in the inflation rate since July 2021 has several reasons, including base effects from low prices in 2020. In particular, the temporary decrease of VAT rates and the decline in the price of petroleum products will have an increasing effect on overall inflation until the end of 2021. The VAT rate decrease was aimed at mitigating the economic effects of the COVID-19 pandemic last year by boosting domestic consumption.

The 3% rate, the highest in the eurozone since the end of 2011, exceeded the European Central Bank’s goal of 2% although the bank considers the inflation to be temporary.

Given the difficult start of the year, with a postponement of the economic recovery as a result, it is not surprising that the labour market was not able to recover further in the first quarter of 2021. But at the same time, the impact of the surge of infections and corresponding restrictions at the beginning of 2021 was limited.

Economists say the high inflation is likely due to the reopening of economies and supply issues that could subside next year.