With inflation of 7.5% in March, the euro zone is discovering levels of inflation unknown since its creation. This inflation is mainly due to energy and food prices, which have jumped due to the war in Ukraine, although core inflation, excluding food and energy, is also increasing.
And it’s probably not over. The war in Ukraine makes any forecast difficult, but it is reasonable to expect that inflation will be even higher in April, due to the lag between the development of energy and food prices on world markets and prices products derived therefrom for the consumer.
This inevitably erodes the purchasing power of households, even in countries where indexation mechanisms for certain incomes are provided for. This also puts the European Central Bank (ECB) in a very difficult position. First of all, the current inflation can hardly be influenced by the ECB because it is a supply shock of external origin. Therefore, its policy is very difficult to define. On the one hand, demand is already severely dampened by the massive compression of real wages, disruptions in production, falling consumer confidence and tighter financing conditions due to rising bond yields. Conversely, remaining idly by runs the risk of de-anchoring inflation expectations, which could prove painful in the medium term. In a nutshell: these are difficult times for the eurozone.
Overheating inflation
On the other side of the Atlantic, inflation is not to be outdone since it has reached 8%. However, the situation remains very different. On the one hand, energy is only responsible for about a quarter of inflation (compared to more than half in the euro zone). On the other hand, US inflation is more the result of an economy close to overheating: the US economy is less affected by the war in Ukraine and the economic indicators there are very good. The March employment report, published on Friday, is the best proof of this: the US economy created 430,000 jobs in March and the figures for previous months have been revised upwards. Unemployment fell to 3.6% (3.8% in February) and, icing on the cake, wages increased by 5.6% over one year. The acceleration of wages is certainly a problem for the margin of companies and a risk of further price increases in the future, but in the very short term, it partially erases the effect of inflation on purchasing power. Household.
In conclusion, while the euro zone wonders if it is not falling into stagflation, the United States seems to be solidly continuing its post-covid recovery. The contrast becomes striking.
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