It’s tempting to think that, with headlines about the soaring cost of living arriving almost daily, that rising inflation is just a UK problem.
It was revealed on Wednesday morning that inflation across the eurozone rose by a record 5.1% during January – up from 5% in December and wrong-footing economists who, on average, had expected a slowdown to 4.4%.
The key drivers for inflation across the 19 countries using the single currency were, as in the UK, higher energy prices which, according to Eurostat, the European Commission’s statistical arm, rose at an annualised rate of 28.6% during the month.
Unprocessed food, the price of which rose at an annualised rate of 5.2% during the month, was also a big contributor.
Within the euro area there are, however, some big differences.
Germany, the eurozone’s biggest and most important member, saw inflation of 5.1% in line with the zone as a whole.
In France, though, the cost of living rose at a rate of just 3.3% during the month – which will come as music to the ears of Emmanuel Macron as he seeks re-election in the presidential elections in April.
Elsewhere across the eurozone, inflation is already at dangerously elevated levels, running at 7.6% in the Netherlands and at 8.5% in Belgium.
Worse still is the rate in two of the three Baltic countries, with inflation running at 12.2% in Lithuania and at 11.7% in Estonia, where the central bank warned recently of an over-heating property market and an economy growing so rapidly that production capacity is running close to its limits.
All of this creates a significant headache for the European Central Bank (ECB), whose inflation target is 2%, as with the Bank of England.
However, while the Bank of England has begun raising interest rates from their all-time pandemic low and the US Federal Reserve is expected to begin doing so next month, the ECB has no such plans in the near future.
It is not even due to bring to an end its €1.85trn pandemic emergency purchase programme (PEPP), its latest version of money-printing, until the end of March.
Christine Lagarde, the ECB’s president, told French radio two weeks ago: “We’re all in very different situations.
“The cycle of economic recovery in the US is ahead of that in Europe. So we have every reason not to act as quickly or as ruthlessly as one might imagine with the Fed.”
She said that raising interest rates too soon would risk “putting the brakes on growth”.
Those comments have not, though, been enough to persuade financial markets that the ECB will not raise interest rates earlier than expected.
The Euro Short Term Rate, a key benchmark, is currently pointing to an interest rate rise on 15 December. That would be the first rate rise, should it materialise, since the ECB – under Ms Lagarde’s predecessor-but-one, Jean-Claude Trichet – raised the cost of borrowing in July 2011.
Another closely-watched financial barometer, the yield on the 10-year bund (a German government IOU), today rose to 0.051% – a level not seen since April 2019.
On the foreign exchange markets, meanwhile, the euro surged by 0.5% against the US dollar and also rose against other currencies including the pound.
Joerg Kramer, chief economist at the German banking giant Commerzbank, said: “At 5.1%, the inflation rate for January was miles above the 4.1% the ECB has been forecasting for the first quarter. The unexpectedly high inflation rate is a slap in the face for the ECB.
“It will have to finally recognise the massively increased inflation risks and take its foot off the pedal of monetary policy.”
Ms Lagarde is expected to continue at this week’s ECB policy meeting to stick to her line that the current elevated level of inflation is “transitory”, in the jargon, with no interest rate rises needed this year.
But that may not be enough to satisfy critics, particularly in northern European countries like the Netherlands, that the ECB has gone soft on inflation.
The German public, in particular, are very inflation-conscious and its media are all too happy to bash the ECB on occasions.
This famously saw Bild, Germany’s best-selling newspaper, once mock up a picture of Mario Draghi, Ms Lagarde’s predecessor at the ECB, with fangs and a cape as it described him as “Count Draghila” and roared: “The horror for German savers goes on and on.”
Tensions between Germany and the ECB appeared to ease when, in October last year, Jens Weidmann, the president of Germany’s central bank the Bundesbank and a critic of the ECB’s loose monetary policy, resigned.
It is also worth noting that German inflation, at 5.1% last month, was actually lower than the 5.7% it hit in December and the near-30 year high of 6% it reached in November.
Relations between the Bundesbank and the woman the German media has christened “Madame Inflation” were expected to improve when the country’s new government appointed Joachim Nagel as Mr Weidmann’s successor.
However, in his first public remarks last month, he too urged Ms Lagarde to tackle inflation head-on: “The public have significantly less money in their pockets. Many people are understandably concerned about this loss of purchasing power – deeply concerned.
“I see a greater risk that inflation rates could remain elevated for longer than currently expected. Monetary policymakers must be on the alert.”
Concerns are now mounting in Germany that, unless the ECB acts quickly, the higher rate of inflation will feed into higher wage demands with the risk of creating an inflationary spiral.
As Fritzi Koehler-Geib, chief economist at the German state-owned investment bank KfW, put it on Wednesday: “If there is no noticeable downward trend in the inflation rate, the pressure on wage negotiations to reach higher agreements will increase and with it the risk of second-round effects.”
There are already signs that this could be happening.
Joerg Hoffmann, head of the powerful IG Metall trade union, which has nearly 2.3 million members across German industry, said on Thursday last week that, in coming collective bargaining rounds in the iron, steel, metal and electrical industries, the union would be pushing for pay rises in excess of the ECB’s 2% target rate for inflation.
Ms Lagarde has been warned.