By Swann Collins, investor, writer and consultant in international affairs – Eurasia Business News, July 2, 2022

Euro area annual inflation hit record 8.6% in June, up from 8.1% in May according to a flash estimate from Eurostat, the statistical office of the European Union.

The inflation rate in the euro area has never been so high since the introduction of the single currency in 1999. Since the summer of 2021, inflation has steadily increased. 

Looking at the main components of euro area inflation, energy is expected to have the highest annual rate in June (41.9%, compared with 39.1% in May), followed by food, alcohol & tobacco (8.9%, compared with 7.5% in May), non-energy industrial goods (4.3%, compared with 4.2% in May) and services (3.4%, compared with 3.5% in May).

Both France and Spain experienced new inflation records in June with the latter surpassing the +10% threshold for the first time since 1985. French inflation hit +6.5% according to Eurostat, while the French government continue to lower official figures, with +5.8% inflation in June after +5.2% in May (Eurostat registered +5.8% inflation in May for France).

This enduring wave of inflation in Europe since July 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.

In May 2022, as annual inflation in the Eurozone amounted to 7.5% in March and 7.4% in April, ECB bankers began circulating the news that a rate hike will take place in July 2022, in order to curb this inflation. This would be the first rate hike by the ECB since 2011. European central bankers have indeed been used to printing money for more than a decade, hence their difficulty in reacting to the awakening of high inflation since June 2021.

World central banks are increasingly concerned about the problem of sky-high inflation: the European Central Bank (ECB) is ready, if necessary, to tighten monetary policy even more sharply to return eurozone inflation to the target of 2%, but so far it maintains plans to raise key interest rates in July by 25 basis points (bp). This was stated by ECB President Christine Lagarde at the annual meeting of European regulators in Portugal on June 28.

In Germany, food banks and charities are calling for fundamental steps such as an increase in the minimum wage and unemployment benefits, as well as measures against precarious jobs. The increase in the minimum wage to 12 euros per hour is to come in the autumn. The Bundestag recently decided to do so. Currently, the minimum wage is 9.82 euros gross. On July 1st, it will rise to 10.45 euros on a regular basis, and then to 12 euros per hour on October 1st.

In France, President Macron and his government are actually trying to budget inflation, using the general budget of the State to fund social measures to help households (energy paychecks, tariff shields), but at the cost of colossal deficits (2022 deficit envisaged of 6% of GDP if growth remains above 2.5%).

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The situation is also critical in the United States, where annual inflation hit record 8.6% in May, after 8.3% in April 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.

Amid this high inflation in the Euro area and in the U.S., gold prices hit $1,814 per troy ounce at closure on July 1st, 2022 at 05:00 PM NY Time.

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