By Swann Collins, investor, writer and consultant in international affairs – Eurasia Business News, May 18, 2022

The price of olive oil has risen in recent months in Europe, amid high inflation in goods and services.
Photo credit : Eurasia Business News, April 2022.

The euro area annual inflation rate stood at 7.4% in April 2022, stable compared to March, when it hit record high 7.5%. In February, inflation hit 5.4%. A year earlier, registered annual inflation was only 1.6% in the euro zone.

The annual inflation rate in the European Union stood at 8.1% in April 2022, compared to 7.8% in March. A year earlier, it was 2.0%. These figures were published today by Eurostat, the statistical office of the European Union.

The lowest annual rates were observed in France, Malta (5.4% inflation each) and Finland (5.8% inflation). The highest annual rates were recorded in Estonia (19.1%), Lithuania (16.6%) and Czechia (13.2%). Compared with March, annual inflation fell in three Member States, remained stable in two and rose in twenty-two.

In April the largest contributions to the euro area annual inflation rate came from energy (+3.70 percentage points, pp), followed by services (+1.38 pp), food, alcohol & tobacco (+1.35 pp) and industrial goods excluding energy (+1.02 pp).

Eurozone inflation hit 7.4% in March, 5.9% in February, 5.8% in January, 5% in December4.9% in November, 4.1% in October, 3.4% in September and 3.0% in August 2021, according to Eurostat.

This enduring wave of inflation since August 2021 adds pressure on the quantitative easing and purchases assets program of the European central bank (ECB), accused of reducing the purchasing power of the euro currency and provoking inflation as a consequence. In addition, the monetary policy of the ECB has failed to support a strong economic growth. Inflation in the euro zone is currently nearly four times the ECB’s target and will not fall back below 2% for years.

Quantitative easing policies (massive printing of paper money) and low interest rates maintained by the European Central Brank since 2010 (with only few breaks), now associated with supply chain disruptions after coronavirus lockdowns worldwide and Western sanctions against Russian banks, companies and commodities (US ban on Russian crude oil, US and EU ban on Russian state-owned companies trading commodities such as oil, gas, rare earth metals, palladium, gold).

The Dutch central bank chief Klaas Knot, one of the more hawkish members of the ECB’s rate-setting body, has raised the prospect of a half percentage point interest rate increase in July 2022 by the ECB if inflation continues to climb, the first time such an aggressive shift has been mooted.

The situation is also critical in the United States, where annual inflation hit record 7.9% in February and 8.5% in March. This is the highest level of inflation never seen in the United States since February 1982 and the dynamic has been here for months. U.S. inflation already reached 7.5% in January after hitting 7% in December 2021, 6.8% in November and 6.2% in October.

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Amid this high inflation in the Euro area and in the U.S., gold prices have been stable today, hiting $1,825.80 per troy ounce, before stabilizing at $1,817.70 per troy ounce at closure on May 18, 2022 at 03:57 PM NY Time.

Both gold and silver are relatively cheap now as investors ignore the growing risk that the Federal Reserve will push the U.S. economy into a recession as it raised interest rates on March 16 and May 4 and will continue in June 2022 and before December 2022. Such hike rates will pressure the markets and will reduce the availibity of liquidity. Economic dynamism will slowdown and stocks markets will be challenged.

Investors have faith that central banks can engineer a “soft landing” that will weaken the economy enough to slow-growing inflation pressures but not enough to push it into a recession. Our position is that such a faith is a whole illusion. In the 1980’s, the rate hikes implemented by the Fed Chairman Paul Volcker and his team to tackle a 8% inflation have caused a strong recession in the United States. There is no reason that such consequences won’t repeat now.

U.S. Federal Reserve Chairman Jerome Powell told journalists of The Wall Street Journal today that U.S. the central bank’s resolve in combating the highest inflation in 40 years shouldn’t be questioned, even if it requires pushing up unemployment.

Understand here that the Fed will fight inflation at all costs, after more than a decade of bad monetary policy. Expect a recession in 2022 or 2023, a rise in the unemployment rate and an increase in taxation to pay off public debts, whose interest rates will have soared.

With a trade and currency war between the United States and China and Western sanctions against Russia, 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, quantitative easing policies and supply chains disruptions due to war in Ukraine.

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