Runaway inflation in the euro zone, which began in mid-2021, sets a new record and even wakes up the ridiculously reckless ECB

“Temporary” inflation is suddenly runaway inflation. But the idiocy of negative interest rates and QE is finally over.

By Wolf Richter for WOLF STREET.

Eurozone inflation jumped to 9.1% in August, a new record high in eurozone data dating back to 1997, according to preliminary data released today by Eurostat. It peaks at 25.2% in Estonia. Germany reached a record 8.8%.

This spike in inflation started suddenly in early 2021, after years of ECB money printing that turned into pandemic madness, and after years of ECB negative interest rate idiocy. For years it looked like the ECB would get away with these policies without creating runaway inflation, then suddenly in early 2021 the dam burst and inflation swept over the country.

In July 2021, euro area inflation exceeded the 2% inflation target set by the ECB. In August 2021, the inflation rate reached 3.0% and soared.

At the time, the ECB regurgitated the Fed’s line that this inflation was only temporary, and it unhesitatingly continued its idiocy of negative interest rates and printing money with reckless abandon.

Energy prices had already started to soar in January 2021. From early January 2021 to December 2021, crude oil prices jumped by more than 50%. It was a huge price win.

In January 2022, just before Russia invaded Ukraine, the Eurozone inflation rate had risen to 5.1%. In Germany, it also rose to 5.1%, in Belgium to 8.5%. Two Baltic states were already in double digits. Inflation had become a global problem, after years of global money printing and interest rate repression.

The majority of the 9.1% rise in inflation occurred before Russia invaded Ukraine. This situation was then aggravated by the spikes in energy prices, including natural gas, caused by Russia’s invasion of Ukraine and by the sanctions in response to this war.

Russia’s invasion of Ukraine has also torn supply chains originating in Ukraine, including Ukrainian exports of iron, steel, grain, animal feed, electrical equipment, components automobiles, etc.

For example, European automakers have relied on Ukrainian-made wiring harnesses. But when Russia invaded, production stopped. Suddenly there was a shortage of wiring harnesses which led to further production delays among European automakers, further contributing to the shortage of new vehicles and the rise in new vehicle prices, and in particular the rise used vehicle prices, with the shortage of new vehicles increasing the demand for used vehicles.

And inflation continued to rise, with price increases spreading throughout the economy.

Governments have applied different strategies to more or less artificially lower the inflation rate. And that kept the CPI lower (at 9.1%) than it would have been without these measures.

For example, in Germany, the government reduced fuel taxes and in June launched a transport subscription program at €9 per month as part of its energy cost relief program that allowed people to travel unlimited on rail networks, buses and trams across the country, which has proven useful during the summer travel season, but also for commuting. This program, which contributed to a drop in the CPI in June and July, ends today. The September CPI will have to do without it.

Germany’s CPI reached 6.0% in November 2021, long before Russia invaded Ukraine:

Rampant inflation, by euro area country:

IPC, August 2022
Estonia 25.2%
Lithuania 21.1%
Latvia 20.8%
Netherlands 13.6%
Slovakia 13.3%
Slovenia 11.5%
Greece 11.1%
Belgium 10.5%
Spain 10.3%
Cyprus 9.6%
Portugal 9.4%
Austria 9.2%
Italy 9.0%
Ireland 8.9%
Germany 8.8%
Luxemburg 8.6%
Finland 7.6%
Malta 7.1%
France 6.5%

Even the ECB sees that it is presiding over a monster show on inflation.

The ECB has been ridiculously reckless in its QE and negative interest rate policies. But both are now over.

QE ended in June when its balance sheet reached 8.84 trillion euros in total assets. According to its most recent balance sheet, as of August 26, total assets, at €8.75 trillion, were down €86 billion from the peak:

And the idiocy of negative interest rates ended on July 21, when the ECB raised its key rate by 50 basis points, from -0.5% to 0.0%.

And yes, it sounds equally ridiculous that a central bank would ultimately raise its key rate to 0% to deal with 9.1% inflation. It’s a horrible bad joke gone wrong.

But the rate hike marked the end of the absurd and destructive experiment with negative interest rates. And more rate hikes are coming, starting in September, possibly with a 75 basis point hike. Even the ECB understands somewhere, on a vague and distant level, that runaway inflation is a major problem for an economy and for the people and businesses within it.

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