By Swann Collins, investor, writer and consultant in international affairs. Eurasia Business News – January 12, 2022

View on the business and financial center “La Defense”, in Paris, France. Photo credit : Swann Collins, January 2020.

The rate of annual inflation of the euro zone hit 5% in December, after 4.9% in November, 4.1% in October, 3.4% in September and 3.0% in August, according to a flash estimate issued by Eurostat, the statistical office of the European Union.

Never has the statistical office of the European Union recorded such a figure since the start of its estimates, in January 1997, for the 19 countries that have adopted the single currency. In November, inflation in the euro zone had already broken a record, at 4.9%.

Regarding the main components of inflation in the euro zone, energy is expected to experience the highest annual rate in December (26.0%, compared to 27.5% in November), followed by food, alcohol & tobacco (3.2%, compared to 2.2% in November), industrial goods excluding energy (2.9%, compared to 2.4% in November) and services (2.4%, compared to 2.7% in November).

Spain (6.7%) and Germany (5.7%) saw the largest increases in December, exceeding the European average. Prices remained more stable in Italy (4.2%) and especially in France (3.4%), according to harmonized European data calculated by Eurostat.

These figures are well above the European Central Bank’s (ECB) target of 2% inflation in the euro area. But for the monetary institution based in Frankfurt, this inflation is transitory. The surge in prices in recent months would be explained above all by the exceptional increase in gas and electricity prices and by supply chain disruptions because of coronavirus pandemics.

The rise in prices is causing concern among working class households whose incomes are not increasing at the same rate. The anguish is particularly palpable in Germany, the largest European economy, where inflation, at its highest since 1992, is on the front page of the newspapers.

Annual inflation also breaks record in America, with 7% in 2021. The U.S. Consumer Price Index for All Urban Consumers (CPI-U) increased 0.5 percent in December on a seasonally adjusted basis after rising 0.8 percent in November, reported the U.S. Bureau of Labor Statistics today. Over the last 12 months, the all items index increased 7.0 percent before seasonal adjustment.

The fact is that over the past decade the European Central Bank (ECB) and the U.S. Fed have enforced quantitative easing policies, aiming at boosting economic growth after the global financial crisis of 2008-2009 and revive inflation around a target of 2%. Both central banks have implemented their short rates to zero or below. However, this policy of “rentier euthanasia” with negative yields, as developed by the British economist John Maynard Keynes in the 1930’s, has fuelled more than initially expected the growth of prices of assets and consumer prices, also called inflation, the increase of public deficit spending and as a consequence reduced the purchasing power of paper currency.

Read also : How to invest in gold

Amid this high inflation in the Euro area and in the U.S., gold prices are up 0.35 % on January 12 and up 2.73 % on the past 30 days. The yellow metal is a great hedge against inflation because it rises in price when the cost of living standards rises. Even state central banks have been purchasing physical gold since 2014 to strenghten their national paper currencies amid global economic and political disruptions. Inflation is not expected to significantly lower in 2022, because of persistent high public spending, state deficits, global industrial competition and quantitative easing policies.

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© Copyright 2022 – Swann Collins, investor and consultant in international affairs.