Inflation in the eurozone increased to a record high of 10.7% in October, exceeding analysts’ expectations for an increase of 10.2%. What this means for your finances is explained.
Following Russia’s invasion of Ukraine earlier this year, the EU is also experiencing high energy and food prices, which are driving up the cost of goods and services globally.
Following a minor decline to 9.9% in August, inflation in the UK increased to 10.1% in September, returning to double digits.
The UK’s October inflation data has not yet been released. However, it is widely anticipated that they will show inflation picking up speed once more in the wake of the hike in the energy price cap.
What steps is the European Central Bank taking to curb inflation in the Eurozone?
The European Central Bank (ECB) is under a lot of pressure to keep raising interest rates as a result of double-digit inflation.
The Bank of England has been rapidly raising rates in the UK in an effort to reduce inflation. The ECB, on the other hand, must exercise greater caution across the Channel.
The EU’s economic situation is extremely perilous, and the central bank is cautious about moving too quickly.
Nevertheless, the ECB increased its leading interest rate from below zero to 1.5 percent despite these worries. It is anticipated that the bank will announce a further increase of 0.75% in December, bringing the base rate to 2.25%.
According to some commentators, this might cause the Eurozone to enter a recession. An EU recession would ultimately be detrimental to the UK economy because weaker demand would affect both imports and exports.
The value of the euro could be harmed by a recession. One possible benefit is that vacationers and importers may find it more affordable as a result.
Will UK inflation be impacted by Eurozone inflation?
For investors and consumers here in the UK, more inflation in the Eurozone is hardly positive news.
Given that the majority of the rise is due to increasing energy and food prices, it might be interpreted as a portent of things to come.
In October, energy costs across the Eurozone increased by 41.9% from the previous month’s 40.7%. Food, drink, and tobacco prices increased by 13.1%, up from an increase of 11.8% in September.
More concerningly, core inflation, which excludes volatile costs for food and energy, increased to 5% from 4.8% in September. According to this figure, inflation is likely to become more pervasive throughout the economy and much more difficult to control.
What does rising inflation in the Eurozone imply for you?
In the end, more inflation in the Eurozone will result throughout higher interest rates in the rest of Europe. The Bank of England may be forced to increase interest rates even further as a result of rising prices.
For savers, who will now earn more on their savings, this is wonderful news. Higher interest rates will raise the cost of borrowing, which is bad news for borrowers.
The pound might appreciate in value relative to the euro if interest rates in the UK eventually stabilize at a higher level than in the Eurozone.
This suggests that travelers to the EU may be able to obtain more for their money.
The UK’s inflation may be lowered by a stronger pound.
Unfortunately, while the majority of people in the UK may not notice the increased prices across the EU, they will have an impact here.
Since the EU is the UK’s largest trading partner, rising prices will benefit the region’s exports. Consumers in the UK may end up paying more as a result. It appears that real pay growth will remain negative because wages already lag behind inflation.