Inflation Hits Record 8.9% in Euro Area, But Economy Grows

LONDON — Inflation in the European countries using the euro currency shot up to another record in July, pushed by higher energy prices fueled by Russia’s war in Ukraine, but the economy still managed better-than-expected, if meager, growth in the second quarter.

Annual inflation in the eurozone’s 19 countries rose to 8.9% in July, an increase from 8.6% in June, according to numbers published Friday by the European Union statistics agency.

Inflation has been at its highest level since 1997 when records were first kept for the euro. This led to the European Central Bank raising interest rates for the first time for 11 years last week and signalling another increase in September.

Due to concerns about gas supplies, energy prices rose by 39% in July. They were only slightly higher than last month. Food, alcohol, and tobacco prices rose 9.8% faster than last month’s increase due to increased transport costs, scarcity, and uncertain supply in Ukraine.

“Another ugly inflation reading for July,” said Bert Colijn, senior eurozone economist for ING bank, adding that there was “no imminent sign of relief.”

The eurozone’s economy, meanwhile, grew from April through June, expanding by 0.7% compared with the previous quarter, despite stagnation in Germany, Europe’s traditional economic engine. France managed to avoid a recession with modest growth of 0.5%, while Spain’s expansions were 1%, and 1.1%, respectively.

Economists pointed out the recovery in tourism after the COVID-19 epidemic. There were fewer staff at airports, and more flights packed during the summer. This led to chaos for travelers.

As inflation continues to rise above expectations, economists believe that economic growth is the final glimmer for positive news. Rising interest rates and a worsening energy crisis will push the region into recession this year.

“This is as likely to be as good as it will get for the eurozone for the foreseeable future,” Andrew Kenningham, chief Europe economist for Capital Economics, wrote in an analyst note.

Europe’s growth contrasts with the United States, whose the economy has contracted for two straight quarters, raising fears of a recession with inflation at 40-year highs. But the job market is even stronger than before the COVID-19 pandemic, and most economists, including Federal Reserve Chair Jerome Powell, have said they don’t think the economy is in recession.

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However, many people are increasingly expecting an economic recession in the U.S. later in the year or next. This is similar to what happened in Europe.

Europe’s risk is largely tied to its reliance on Russian energy, with Moscow throttling down flows of natural gas that power factories, generate electricity and heat homes in the winter.

Fears that Russia may endanger supplies have been raised by further reductions in Nord Stream 1’s major German pipeline. The Kremlin could impose rationing in energy-intensive areas and increase already high levels of inflation caused by rising energy prices. This is likely to lead to the bloc’s 27 members going into recession.

European Union nations have approved this week a reduction in gas usage by 15%. They also passed tax cuts, subsidies and other measures to address a rising cost of living. But Europe is still at the mercy Russia.

A cold winter, when natural gas demand soars, could draw down storage levels that governments are now scrambling to fill but has been made infinitely harder by Russia’s cuts.

“With the region’s gas supply now reduced and inflation set to remain high for some time, the eurozone is likely to fall into recession,” Michael Tran, an assistant economist with Capital Economics, said in an analysis this week.

The European Central Bank raised rates to reduce inflation but it was behind other central banks such as the Fed or the Bank of England when making credit less expensive. This is because they were afraid of the huge impact of rising energy prices linked to war.

The impact of the ECB’s recent rate hike on inflation was “very limited, although it does add to a further cooling of demand in the eurozone,” wrote ING’s Colijn.

“With a recession looming and inflation reaching new highs, the question is how the ECB will respond to an economy which is already cooling down,” he said.

—Barry contributed from Milan.

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