EUROZONE inflation surged to a 10-year-high in August with further rises likely, challenging the European Central Bank (ECB)’s benign view on price growth and its commitment to look past what it deems a temporary increase. Consumer inflation in the 19 countries sharing the single currency accelerated to 3 percent this month from 2.2 percent in July, far above expectations for 2.7 percent and moving well clear of the ECB’s 2 percent target. The increase was fuelled by energy costs, but food prices also surged, while there were unusually large increases in the prices of industrial goods too, according to Eurostat, the EU’s statistics agency. Markets mostly shrugged off the data, with stocks rising and yields increasing just a basis point or two, suggesting the narrative of temporary inflation and ultra-easy central bank policy for years to come remains the central one. Still, the numbers are likely to make for uncomfortable reading at the ECB. The central bank has repeatedly raised its inflation projection this year only for the actual numbers to beat its forecasts, and price growth now seems likely to peak only in November. With inflation in Germany, the eurozone’s largest economy and the ECB’s biggest critic, expected to approach 5 percent in coming months, the bank is likely to come under increasing public pressure to address price developments that are reviving long-dormant memories of runaway prices. The ECB argues that a slew of one-off factors including production bottlenecks related to the economy’s reopening after the COVID-19 pandemic account for the bulk of the inflation surge, and that price growth will quickly moderate early next year. “The effects of re-opening and supply problems could intensify in the next few months. But we suspect that they will begin to fade next year as global consumption and trade patterns return to something like their pre-pandemic norms,” Capital Economics said in a note. “We think the headline rate will drop to about 2 percent in January and trend down throughout 2022 to end next year at around 1 percent,” it added. Longer-term market-based inflation expectations are also holding well below 2 percent, even if they have moved steadily higher this year. ECB policymakers agree and predict that inflation will languish well below the bank’s target for years to come, so they even reinforced their commitment last month to keeping monetary policy exceptionally loose to generate price pressures. ECB chief economist Philip Lane argued that these inflation surprises still did not challenge his views about the temporary nature of price pressures as wage growth, a necessary component of durable inflation, remained muted. While ECB policymakers are acknowledging that they underestimated price pressures in the near term, they continue to point to weak underlying inflation readings as supporting evidence for loose policy. (SD-Agencies) | 