German inflation hit its highest rate in 40 years when European Central Bank President Christine Lagarde warned that Russia’s war in Ukraine was causing a “supply shock” for the German economy. eurozone.
A 39.5% rise in energy prices year-on-year was the main driver behind the higher-than-expected increase in harmonized consumer prices in Germany at 7.6%, which was announced hours after the government took the first official measure to ration gas supplies. Berlin is bracing for a potential halt to gas deliveries from Russia over a dispute over payments.
Presenting his gloomiest assessment yet of how the invasion would affect the bloc’s economy, Lagarde noted Europe was “entering a difficult phase” as it explained how soaring prices for energy, food and manufactured goods would squeeze consumers’ purchasing power.
The war was driving up prices, slashing growth and undermining consumer and business confidence, Lagarde said in a speech Wednesday.
“Obviously, the longer the war lasts, the higher the economic costs will be and the greater the likelihood that we will end up in worse scenarios,” she said, noting that rising energy prices had already reduced eurozone revenues by 1.2% in the fourth quarter of 2021. “This figure would imply a loss of around 150 billion euros in one year,” she added during a speech to Cyprus.
The group of economists who advise the German government have warned of a ‘substantial’ risk of recession if Russian energy imports are halted, which could push inflation in Europe’s biggest economy up to 9 %.
The council of economic advisers has also slashed its growth forecast for Germany in 2022 from 4.6% to 1.8% and raised its inflation forecast from 2.6% to 6.1%.
The Federal Statistical Office said consumer price inflation in March was 7.3%, its highest level since 1981. On the harmonized measure used in the EU, German inflation rose even faster at 7.6%, the highest rate since records began in the 1990s and up from 5.5% in February.
The inflationary impact of the war in Ukraine, which has triggered a spike in the prices of oil, gas and other commodities, has been underlined as German prices rose at a record monthly rate of 2.5% between February and March.
“The bad news is that this won’t be the end of accelerating inflation,” said Carsten Brzeski, head of macro research at ING. “The only way is to go up and double-digit numbers can no longer be ruled out.”
Meanwhile, annual inflation in Spain soared to 9.8% in March, its highest level since 1985, rising from 7.6% last month and well above expectations, the statistics office said. from the country. noted Wednesday.
Economists expect overall price growth in the euro zone to set a new high of 6.6% in March, when those figures are released on Friday.
A survey by the European Commission published Wednesday showed that consumers and businesses in the euro zone and the EU have become much more pessimistic since the Russian invasion last month, fearing that it will reduce spending, increase unemployment and increase the price faster.
The commission said its eurozone economic sentiment indicator fell 5.4 points to minus 108.5 this month, its lowest level in 12 months, “mainly due to falling consumer confidence. consumers”.
Confidence fell among businesses in manufacturing and retail, but stabilized in services, the commission said. Inflationary pressures intensified as business expectations for selling prices hit an all-time high.
The labor market outlook has also deteriorated, with consumer expectations for unemployment rising sharply and job expectations falling in most sectors except services.
Investors are betting that the ECB will hike rates multiple times and bring them down to zero by the end of the year. They increased those bets on Wednesday, pushing the yield on Germany’s benchmark 10-year bond to 0.7%, a four-year high.
The ECB reacted to soaring inflation this month by outlining plans to halt net bond purchases by September, paving the way for a rate hike this year if inflation remains high. . Lagarde said Wednesday, “The best way for monetary policy to navigate this uncertainty is to emphasize the principles of optionality, progressivism and flexibility.”
But the ECB President also signaled that EU governments could do more to support the economy, saying: “Europe needs a plan to ensure that the necessary investments come online as quickly and smooth as possible, with public and private funding reinforcing each other”.