Home > 4 takeaways after Euro area inflation reached 5%

4 takeaways after Euro area inflation reached 5%

Annual inflation in the euro area reached 5% in December 2021, up from 4.9% in November. So what should investors expect in 2022?

Last week, the US inflation data for December 2021 revealed that the prices of goods and services have increased by 7% YoY, close to a four-decade high. Today it was the Euro area’s turn to release the inflation data for December 2021 – it rose by 5% YoY, with huge discrepancies between different euro area countries.

Here are four takeaways from today’s inflation data: the euro area is different than the US, the energy shock and supply bottlenecks to have lasting consequences, the German VAT effect to weigh on inflation, and wide discrepancies between various members.

Euro area  is different than the US

One explanation for the fact that inflation in the euro area is not as high as the one in the US comes from wages. Wage growth is much more subdued than in the US. Rising wedges were responsible for the Federal Reserve shifting its tone towards a more hawkish one as inflation is not seen as transitory anymore.

Energy shock and supply bottlenecks to have lasting consequences

Supply bottlenecks and the energy cross are poised to have lasting effects on inflation. Europe faced record-high energy prices this winter, and supply bottlenecks led to further increases in the prices of goods and services.

To exemplify, in December, the highest contribution to the annual euro area inflation rate came from energy (2.46%) and services (1.02%).

German VAT effect to weigh on inflation

The German VAT is an important considerent for future inflation in the euro area. It is estimated that by dropping out from the HICP in January, it will lower the core inflation in the euro area by about 0.35%.

Wide discrepancies between various members

Last but not least, today’s euro area inflation showed huge discrepancies between member countries. The highest inflation rate was recorded in Estonia at 12% YoY, while the lowest was recorded in Malta at 2.6% YoY.

All in all, inflation trends higher in the euro area and in other parts of the world too. As central banks prepare to tighten their financial conditions, inflation should peak somewhere in 2022.

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