Eurozone Inflation Soars to 7.5%

The European Union’s statistics agency on Friday said consumer prices were 7.5% higher in March than a year earlier, a jump from the 5.9% rate of inflation recorded in February.

It was the fifth straight month the inflation rate hit a new high in a data series that goes back to the start of 1997, two years before the euro was launched. National figures suggest that the current rate of inflation could be even higher. Germany’s measure of inflation for March was the highest since 1981, while Spain’s was the highest since May 1985.

“Inflation keeps on coming in stronger than we’ve expected and all the other forecasters have expected,” said Jack Allen-Reynolds, an economist at Capital Economics. “So that implies there’ll be an even bigger hit to household incomes and possibly a bigger hit to consumption.”

Much of the pickup in inflation has been driven by energy prices, which were 44.7% higher than a year earlier, having been 32% higher in February. Food-price inflation also picked up, to 5% in March from 4.2% in February. Russia and Ukraine are big exporters of wheat, and difficulties transporting that grain through the Black Sea and other routes, as well as the possibility that Ukraine won’t be able to plant for next year’s harvest, have pushed global prices higher.

The U.S. has yet to release figures for March, but in February the annual rate of inflation rose to 7.9%, its highest since January 1982. While consumer prices in the U.S. have been rising as rapidly as in the eurozone, so have wages, leaving eurozone workers facing a larger loss of real spending power.

Late last year, ECB policy makers had been counting on a decline in energy prices—as demand for winter heating fuels eased toward the end of March—to help reverse the rise in inflation and bring it back to its 2% target by the end of this year.

Russia’s war in Ukraine has dashed those hopes. The ECB’s economists now expect the inflation rate to average 5.1% this year, having raised their forecast from the 3.1% projected in December. Economists said a 7.1% increase is possible if energy prices are higher than they assume.

The invasion also means economic growth should be weaker than the ECB had expected at the start of the year, largely because high energy and food bills will reduce the amounts households can spend on other goods and services.

With inflation set to accelerate further, investors and traders increasingly expect the ECB to raise its key interest rate this year. The central bank last month announced a reduction in its purchases of bonds that could see the program end in the three months through September. At that time, it said a rise in its key rate could follow “some time” after the end of bond purchases.

Recent falls in the prices of government bonds suggest investors now anticipate two or more rate rises this year, each of a quarter of a percentage point, followed by as many as three in 2023.

The ECB’s biggest worry is that higher energy prices will push workers to ask for larger wage rises than they have received recently and that businesses already facing higher energy costs will raise their prices to preserve their profits, setting off a further round of wage demands.

Those worries are partly fed by a jobs market that was strengthening before Russia’s invasion. Figures released by Eurostat Thursday showed the eurozone’s unemployment rate fell to a record low of 6.8% as 181,000 workers found jobs. The decline had been particularly rapid among younger workers over the previous 12 months, with the unemployment rate for people aged 25 years or under falling to 14% in February from 18.6% a year earlier. That drop was more than three times as large as for the working-age population as a whole.

Despite the steady fall in the unemployment rate over the past year, workers aren’t getting bigger pay increases for now. The ECB’s own measure of pay deals negotiated by labor unions and similar groups recorded a modest 1.5% increase in 2021, the smallest rise since 2017.

ECB officials have stressed that they could also respond to the impact of the war on the economy by providing more stimulus, rather than withdrawing it.

“We should also be fully prepared to appropriately revise our monetary policy settings if the energy price shock and the Russia-Ukraine war were to result in a significant deterioration in macroeconomic prospects and thereby weaken the medium-term inflation outlook,” ECB chief economist Philip Lane said in a speech Thursday.

—Anna Hirtenstein contributed to this article.

Write to Paul Hannon at [email protected]