Eurozone hit by runaway inflation, fears of ‘fragmentation’ after years of negative interest rates and reckless QE
Runaway inflation started in mid-2021, but the ECB called it temporary. In June, it varied from 6% to 22%!
By Wolf Richter for WOLF STREET.
Eurozone inflation hit a new record high in June, according to preliminary data released today by Eurostat. The headline CPI rate accelerated to 8.6% in June, from 8.1% in May and 7.4% in April. All were records in eurozone data dating back to 1997.
Inflation started to soar in August 2021, when it hit 3.0% for the Eurozone, well above the ECB’s 2% target, but the ECB, mimicking the Fed, called it temporary. In December 2021, headline eurozone inflation reached 5.0%, with two Baltic countries already in double digits.
This happened suddenly after years of radical money printing and negative interest rate policies, when excess demand for goods was followed by supply chain problems to produce those goods, and this explosion of demand for goods has occurred globally, but particularly in the United States, creating all sorts of supply chain chaos and price pressures, all of which have triggered a wide range of behavioral changes among businesses and consumers where price increases were suddenly tolerated and higher costs were successfully passed on, and took root as the inflationary mentality took hold.
And the President of the ECB Christine Lagarde swept it all away for far too long – even though they’re finally taking it too seriously.
Energy costs have been rising all past year, and in early 2022 additional spikes in energy commodities occurred as Russia invaded Ukraine and the European Union, United States and other countries imposed sanctions on Russia. The war in Ukraine has also torn supply chains for agricultural products globally and manufactured goods for European manufacturers.
But many commodity prices have been falling for some time, and the crude oil price spike has stalled for now, and the wild European natural gas price spike that occurred in March has been partially reversed.
And yet, inflation continues to rise as price hikes have spread throughout the economy.
Bundesbank President Weidmann resigns in disgust.
In September 2021, inflation in Germany reached 4.1%, the highest since the existence of eurozone data. In November 2021, inflation in Germany reached 6.0%.
Having seen this coming and having warned of soaring inflation for months, while being ignored by Lagarde, then Bundesbank President Jens Weidmann, one of the few inflation hawks remaining at the ECB, asked German President Steinmeier to remove him from office as of December 31. , 2021 for “personal reasons”. Everyone knew why he had done it: disgust with the ECB’s monetary policies.
In his official statement at the time, Weidmann made some soft and vague allusions to his apprehensions about the ECB’s handling of inflation, for example when he said that it would be “crucial” not to examine “unilaterally the deflationary risks”, but also to examine the “potential inflationary dangers”. And inflation reached 8.7% in Germany in May 2022.
In June, according to preliminary data based on the EU’s harmonized inflation measure released today, inflation in Germany fell to 8.2%.
But this drop was largely due to the government’s actions to help reduce this runaway inflation, such as reducing fuel taxes and offering from June 1 a €9 per month pass in part of the Energy Cost Relief Package which allowed people unlimited travel on buses, trams and rail systems across the country, which during the travel season represents huge savings, in addition reductions in travel costs. And so the CPI fell slightly in June.
From the least terrible to the most horrible inflation.
The ECB’s nightmare is not only the extent of inflation but also the CPI rate range by country, with 9 out of 19 eurozone countries experiencing double-digit inflation rates ranging from 10 .3% in Luxembourg to 22% in Estonia. The country with the least terrible inflation rate was Malta, at 6.1%.
These are frightening and massive inflation rates in the 19 eurozone countries:
The risk of “fragmentation”.
In its response to this runaway inflation, the ECB has now ended QE and signaled that it will eventually raise interest rates in July, with perhaps a bigger rate hike in September, and that interest rates will negative interest rates would turn into positive rates this year. This would mark the end of the utterly absurd and destructive experiment of negative interest rates.
It’s ridiculously too little, too late. An enormous amount of damage has already been caused by this galloping inflation. But the mere threat of ending QE and raising rates sent government bond yields soaring — and diverging.
A year ago, the German 10-year yield was -0.2%, while the Italian 10-year yield was +0.8%, and the gap between them was around 1.0 points percentage.
In mid-June, the German 10-year yield reached +1.75% and the Italian 10-year yield climbed to 4.17%, and the gap between them more than doubled to 2.4 points percentage. It was then that the talk of “fragmentation” hit the headlines.
This resurgent divergence in bond yields, as the bond market grapples with the first signs that it is being manipulated a little less by the ECB, is scaring some people at the ECB, Italy (including “whatever it costs” the former head of the ECB, Draghi who is now Prime Minister of Italy), in Greece and other countries in budgetary difficulty.
The resurgence of the divergence in bond yields is scaring the ECB, which now fears a “fragmentation” of the euro zone. The number one objective of the ECB is not to contain inflation, but to maintain the cohesion of the euro zone.
So it has now devised a new scheme under which it will interfere more and even more selectively in the bond markets to prevent price discovery, under which it will let German and other bonds off its balance sheet when They will mature, but if the spreads between Germany and countries like Italy widen beyond a red line, it will buy those countries’ bonds. In other words, he ends global QE, but does QT for Germany and QE for Italy, or whatever.
Right after these talks and announcements – nothing has happened yet – the spread between Italian and German 10-year yields narrowed to 1.86 percentage points today. And inflation is raging more than ever in the euro zone.
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