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Flags of the European Union flutter in front of the headquarters of the European Central Bank (ECB) … [+] in Frankfurt am Main, western Germany, on March 12, 2020. – The ECB’s governing council left its key interest rates unchanged but unveiled fresh stimulus to keep liquidity flowing in the face of the worsening coronavirus crisis, joining efforts by central banks around the world. (Photo by Daniel ROLAND / AFP) (Photo by DANIEL ROLAND/AFP via Getty Images)
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There seems to be no escape from the ravages of inflation. Not even in the usually-stable European Union. The a problem that could likely lead to higher costs of borrowing money.
Price levels are surging in Germany and Spain as the impact of the war in Ukraine exacerbates the already problematic supply chain disruptions that started during the COVID-19 pandemic.
“The Ukraine war, the legacy of the pandemic and the threat of new supply-chain disruption from China look set to keep inflationary pressures very high,” states a recent report from London-based consulting firm Capital Economics.
German inflation hit 7.6% in February, while in Spain it hit a staggering 9.8%, the report states. Germany is Europe’s largest economy while Spain is smaller it is still significant. Both are big worries for policy makers.
Data for France and Italy come out tomorrow and will likely show jumps in the price level.
The Capital report forecasts that the German inflation rate will average 7% or more this year. That will likely prompt Europe’s monetary authority to lift the cost of borrowing money in an effort to bring inflation back down to more moderate levels around 2%.
“With headline inflation so high and still rising, it seems increasingly likely that the ECB will not want to wait and see how high core inflation rises,” the report states. “With that in mind, we will be publishing revised, higher, interest rate forecasts shortly.”
In other words, it’s going to start costing debtors a lot more money.
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