# High inflation, recession risk widen ECB dilemma Author: Pal Sinha, Barnali Author URL: https://financedigest.com/author/pal-sinha-barnali Published: 2022-08-31 Category: NEWS Category URL: https://financedigest.com/category/news Meta Title: Euro Zone Inflation Hits Record High Amid Recession Fears Meta Description: Euro zone inflation reaches double digits, leading to significant interest rate hikes and tough choices for the European Central Bank. Learn more here. URL: https://financedigest.com/high-inflation-recession-risk-widen-ecb-dilemmahtml ![undefined](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/2022-08-31t090242z1lynxmpei7u0avrtroptp4eurozone-inflation-france-1736815327782-compressed.jpg) FRANKFURT (Reuters) -Euro zone inflation jumped to another record high and will soon hit double-digit territory, heralding a string of big interest rate hikes even as a painful recession appears increasingly certain. Driven by expensive gas and a devastating drought, consumer prices jumped more than expected in August and further rises are already in the pipeline, suggesting more pain for households and businesses as they burn through their cash reserves. This coincidence of high prices and low growth, often referred to as stagflation, leaves the European Central Bank with only painful choices that will increase the pain for the euro zone’s 340 million people. Stimulus for the bloc will only fuel more [inflation and ultimately damage the bank’s](https://www.financedigest.com/inflation-trumps-financial-risks-as-central-bank-tightening-set-to-continue.html "Inflation trumps financial risks as central bank tightening set to continue") credibility, threatening the very foundations of its inflation-fighting mandate. But policy tightening will [slow growth](https://www.financedigest.com/uk-growth-slows-sharply-in-july-as-covid-pingdemic-hits.html "UK growth slows sharply in July as COVID ‘pingdemic’ hits") even further, exacerbating a downturn now all but certain from the start of the heating season. Ultimately policymakers will choose the fight against [inflation and rates](https://www.financedigest.com/hotel-investors-should-they-be-worried-about-a-potential-economic-pause-delving-into-inflation-interest-rates-recession-etc.html "‘Hotel Investors – should they be worried about a potential economic pause?’ delving into inflation, interest rates, recession etc") are likely to rise at every remaining meeting this year, pushing up borrowing costs for governments, firms and households, even as finances are already becoming tighter. Wednesday’s [inflation figures](https://www.financedigest.com/french-inflation-revised-upwards-in-february-to-7-3-final-figures.html "French inflation revised upwards in February to 7.3% – final figures") will even strengthen the case for an exceptionally large, 75-basis-point ECB rate hike next week and policy doves will have to fight an uphill battle to downgrade the move to a still large 50 bps. [Inflation in the 19 countries sharing the euro](https://www.financedigest.com/euro-zone-consumers-more-optimistic-on-inflation-ecb-survey-shows.html "Euro zone consumers more optimistic on inflation, ECB survey shows") currency accelerated to 9.1% in August from 8.9% a month earlier and again beat expectations as price pressures broadened. The [inflation rate](https://www.financedigest.com/uk-inflation-rate-unexpectedly-rises-to-10-4-in-february.html "UK inflation rate unexpectedly rises to 10.4% in February") is likely to leap upward in September,” Commerzbank economist Christoph Weil said. Consequently, the pressure on the [ECB to continue raising interest rates](https://www.financedigest.com/fed-rates-up-boe-up-ecb-up-stocks-up.html "Fed rates up, BoE up, ECB up, stocks up") significantly is likely to remain high. While the rise in food and energy prices was unsurprising, the [jump in services costs and the 5% inflation](https://www.financedigest.com/oil-jumps-on-lower-than-expected-us-inflation-data.html "Oil jumps on lower-than-expected US inflation data") for non-energy industrial goods will clearly worry ECB policymakers. They will also [worry about the persistent rise](https://www.financedigest.com/sterling-rises-as-receding-bank-sector-worries-lift-sentiment.html "Sterling rises as receding bank sector worries lift sentiment") in underlying prices, which indicates that high costs are now filtering through to the entire economy, through so-called second round effects. Indeed, excluding food and fuel, [inflation accelerated to 5.5% from 5.1% while an even narrower measure](https://www.financedigest.com/factbox-government-measures-to-ease-inflation-pain-2.html "Factbox-Government measures to ease inflation pain"), which also excludes alcohol and tobacco, rose to 4.3% from 4.0%. We now expect the [ECB to hike](https://www.financedigest.com/big-ecb-hike-adds-fuel-to-the-banking-sector-fire.html "Big ECB hike adds fuel to the banking sector fire") by 75 basis points next week even if new staff projections for growth are approaching the downside scenario,” Nordea said in a note. RECESSION? Avoiding a downturn seems increasingly difficult as economic sentiment fell more than expected this month, [highlighting growth](https://www.financedigest.com/solar-panel-mounting-structures-market-expectations-growth-trends-highlighted-until-2031.html "Solar Panel Mounting Structures Market Expectations & Growth Trends Highlighted Until 2031") concerns. High energy costs will force [households to channel their spending towards their heating bill](https://www.financedigest.com/44-of-uk-households-are-worried-theyll-have-to-foot-the-bill-for-net-zero.html "44% of UK Households are Worried They’ll Have to Foot the Bill for Net Zero"), leaving less for other items, particularly services. [Industry is also going to be hit](https://www.financedigest.com/uk-consumer-industries-warn-curbing-energy-support-will-hit-demand.html "UK consumer industries warn curbing energy support will hit demand") hard, with energy-intensive sectors likely curtailing production. That will then [create supply](https://www.financedigest.com/how-to-create-a-sustainable-supply-chain.html "How to create a sustainable supply chain") bottlenecks, adding to inflation. Higher inflation will further weigh on demand, dragging down growth and pushing the [euro zone](https://www.financedigest.com/euro-zone-inflation-eases-in-feb-but-core-prices-pick-up.html "Euro zone inflation eases in Feb but core prices pick up") into recession this winter,” Riccardo Marcelli Fabiani at Oxford Economics said. An energy price cap, contemplated by the EU, could help the ECB’s job, but [inflation is already painfully high and has been for some time](https://www.financedigest.com/love-in-a-time-of-inflation-how-much-will-valentines-day-set-you-back.html "Love in a time of inflation: how much will Valentine’s Day set you back?"), so policymakers will not have the luxury of riding out the storm. The labour market is another concern, adding to the case of [rate hikes](https://www.financedigest.com/ecbs-villeroy-rate-hike-signals-strong-confidence-in-european-banks.html "ECB’s Villeroy: rate hike signals strong confidence in European banks") and letting a recession take hold. With employment already at a record high, labour scarcity is [increasingly painful and it is only a matter of time before wages start surging](https://www.financedigest.com/bicycle-market-growth-to-surge-owing-to-increasing-adoption-by-end-use-applications.html "Bicycle Market Growth to Surge Owing to Increasing Adoption by End-use Applications"), setting off a hard-to-break wage-price spiral. The ECB is keen to stop this even before it takes hold and some relief in an increasingly hot [labour market](https://www.financedigest.com/sterling-little-changed-after-mixed-labour-market-data.html "Sterling little changed after mixed labour market data") even appears welcome. (Reporting by Balazs KoranyiEditing by Tomasz Janowski and Nick Macfie) --- This blog is powered by Superblog. Visit https://superblog.ai to know more. ---