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Global Economy

Inflation harbinger at record high

Producer inflation in the eurozone has intensified. In July, producer prices rose by 37.9 percent compared to the same month last year, as the statistics office Eurostat announced today in Luxembourg. This is the strongest boost since monetary union came into being. Economists polled by Reuters had only expected an increase of 35.8 percent. In June the increase was 36.0 percent and in May it was 36.2 percent.

Important leading indicator for the inflation rate

The background to the rapid increase in prices is primarily the sharp rise in energy prices, which shot up by 96.2 percent in July. Excluding this price increase, industrial producer prices rose by 15.5 percent. In the statistics, the prices are listed from the factory gate – i.e. before the products are further processed or sold.

Producer prices are therefore regarded as an important leading indicator for the development of consumer prices. The inflation rate in the euro zone climbed to a record high of 9.1 percent in August compared to the same month last year, as European statisticians announced mid-week based on a flash estimate.

Pressure on the ECB is growing

Both the high inflation rate and the warning signal from producer prices are increasing the pressure on the European Central Bank (ECB). Experts criticize the monetary authorities in the eurozone for failing to take countermeasures at an early stage in view of the rapid rise in prices.

"The ECB is lagging behind inflation," said Thomas Gitzel, an economist at VP Bank in Liechtenstein. Only in July did the ECB manage to raise interest rates for the first time in eleven years, raising the key interest rate to 0.5 percent.

Does the ECB dare a huge rate hike?

The market is now increasingly speculating on a very strong interest rate hike by the European monetary authorities around ECB boss Christine Lagarde. Some of the largest Wall Street banks recently revised their interest rate forecasts for the euro zone upwards. Economists at Goldman Sachs, JP Morgan and Bank of America are now unanimous in expecting a 75 basis point hike at next week's Governing Council meeting on Thursday.

In the past few days, a number of "hawks" from the ECB Council, i.e. supporters of bold monetary policy action against inflation, had spoken out in favor of such a step. A sharp rise in interest rates of 75 basis points is now also being priced in on the money markets.

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