Recently, eurozone inflation shot above what the ECB targeted in May. This sparked an ensuing debate among the policymaking community whether inflation is a short-term trend or a long term worry.
The recent Eurostat data that revealed a 2 per cent per year inflation created fear among policymakers, economists, and business leaders. This rise in consumer prices is the fastest since the great recession.
The rising prices can be attributed to three major causes, namely increased money supply; the declining value of the Euro; and the supply chain. The pumping of more Euros boosted the economy and helped in avoiding a serious recession but at the same time resulted in higher inflation. Due to the increased money supply, the value of the Euro is continuously weakening since March 2020. The notable cut in the supply of goods along with the huge expansion of the Euro has ultimately resulted in higher inflation.
The inflation spike may emanate from the reopening of certain parts of the economy like travel and other sectors which saw high demand while pandemic but might not persist for long.
The increase in car prices by 30 per cent was the typical example of supply and demand dynamics. The factories, in the end, will produce more fresh cars but the real concern of the economy is for how long. If inflation goes up the European Central Bank (ECB) by raising interest rates will try to slow down the economy which many times leads to recession. The rise in the price of goods is far short-lived in comparison to services because the companies at the end of the day produce more. The economists are keeping an eye on rent and other services to know the signs of a rise there. Rent in the past four months has risen 0.2 per cent each month marking a steady spike but expected to proliferate in the coming months.
In America, inflation has turned political when democrats started saying it's an indication of reviving the economy while Republicans started calling it out of control and a bad economy. Janet Yellen, treasury secretary said she expects inflation to touch 3 per cent and then come back. She also added, “I personally believe that this represents transitory factors.”
Many economists who are outside the ECB assert that inflation is much more than fed by fed. They also claim that contrary to ECB claims, inflation is going to last longer. According to ECB policymakers, the inflation will average around 2.5 per cent and will decline, whereas in the estimates of other economists it could rise to 4 per cent and even more in the coming years. These economists doubt the ECB measurement tools which according to them doesn’t reflect what consumers are purchasing. According to them, official statistics are downplaying the inflation experienced by consumers. They also point out to the markets where increased prices are especially large. In their opinion factors leading to increased prices will persist creating high inflationary pressure.
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