Eurozone Inflation Hits Decade High as Bottlenecks Bite
Jump in inflation will test the European Central Bank’s readiness to let the economy run hot
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Jump in inflation will test the European Central Bank’s readiness to let the economy run hot
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LONDON—Inflation in the eurozone hit its highest level in almost a decade in August amid signs that shortages of semiconductors and other important manufacturing components are pushing up the prices paid by consumers.
Broad consumer prices were 3% higher in August than a year earlier, a pickup from the 2.2% rate of inflation recorded in July and the sharpest rise since November 2011.
The European Central Bank aims to keep inflation at 2%, but last month explicitly said it would leave its key interest rate steady if a period of inflation running above that goal appeared likely to be “transitory.”
Inflation rates have picked up around the world in recent months, largely driven by rising energy costs as a rebound in demand proves stronger than oil and other energy producers had anticipated. But there are signs that shortages of key parts such as microprocessors are also pushing consumer prices higher, threatening a lengthier period of stronger inflation.
“Clearly, risks that inflationary pressures prove more sustainable are on the rise,” wrote Fabio Balboni, an economist at HSBC, in a note to clients.
The jump in inflation comes as ECB rate-setters prepare for their next policy announcement on Sept. 9. They have said the leap in inflation is likely to prove to be the temporary result of shortfalls in the supply of a narrow range of goods and services that will ease as economies around the world reopen more fully.
That is a view shared by many U.S. policy makers. Federal Reserve Chairman Jerome Powell reaffirmed Friday the central bank’s plan to begin reversing its easy-money policies later this year and staked out a position that calls for more patience around when to raise rates. U.S. inflation is higher than it is in the eurozone, reflecting the stronger economic recovery.
Economists think ECB policy makers may slightly trim their bond purchases to reflect a strengthening economic recovery, but will otherwise reassure eurozone households and businesses that borrowing costs won’t soon rise.
“We expect that the ECB will continue to communicate that monetary policy will remain loose for long to avoid any premature tightening of financing conditions,” said Silvia Ardagna, an economist at Barclays.
In forecasts to be released next week, the central bank is expected to predict slightly higher inflation this year, but continue to see the pace of price rises slowing in 2022 and 2023, with the inflation rate once again settling below target. That suggests that the central bank may not raise its key interest rate—which has been below zero for more than seven years—until 2024.
ECB policy makers last month overhauled their policy framework to give themselves room to let the economy run hotter than in the past. The eurozone economy suffered a larger drop in output than the U.S. in 2020 and was once again in recession around the turn of the year.
In the second quarter of 2021, the eurozone’s economy was still 3% smaller than it was at the end of 2019, while the U.S. economy had returned to its pre-pandemic size. But the eurozone economy grew faster than its U.S. counterpart in the three months through June and should return to its pre-pandemic size by the end of this year.
ECB policy makers want to aid the recovery by reassuring households and businesses that they won’t repeat the mistakes of a decade ago, when their predecessors raised their key interest rate before the recovery from the global financial crisis had put down deep roots. What followed those rate increases was 18 months of economic contraction and a long period of very low inflation rates.
Now, policy makers believe they are on strong ground in seeing the pickup in inflation as the economy reopens as temporary. Part of the recent acceleration in price rises is down to tax changes in Germany, the eurozone’s largest member. In July 2020, the government there cut value-added tax to aid the economy, but those cuts were reversed at the start of this year. So prices now are being compared with artificially lower prices a year ago, exaggerating the strength of inflationary pressures.
There are risks to the ECB’s new patience. One is that the problems manufacturers are facing in securing raw materials and parts will prove longer lasting than initially anticipated. In a number of Asian countries where many of those parts are made, the spread of the Covid-19 Delta variant is threatening fresh delays.
“It looks like bottlenecks are going to be more persistent than expected,” said ECB chief economist Philip Lane in an interview with Reuters published last week.
The August inflation figures may carry a warning, since they recorded a sharp acceleration in the rate at which prices of manufactured goods are increasing, to 2.7% from just 0.7% in July.
“This could be a sign that rising input prices and supply problems are starting to put some upward pressure on consumer prices,” said Jack Allen-Reynolds, an economist at Capital Economics.
By contrast, prices of services rose by just 1.1% over the year, and energy costs continued to drive much of the pickup in inflation, with prices rising 15.4% over the year, up from 14.3% in July.
The other risk is that eurozone workers will come to expect inflation to settle above the ECB’s inflation target, and demand higher pay rises to compensate. So far, there are few signs that this is happening. According to a survey by the European Commission released Monday, households in August expected prices to rise faster over the coming 12 months than they did in July, but at a pace that remained modest by historic standards.
Reprinted by permission of The Wall Street Journal, Copyright 2021 Dow Jones & Company. Inc. All Rights Reserved Worldwide. Original date of publication: August 31, 2021
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Amazon, Google, Microsoft and Meta pour billions into artificial intelligence, undeterred by DeepSeek’s rise
Tech giants projected tens of billions of dollars in increased investment this year and sent a stark message about their plans for AI: We’re just getting started.
The four biggest spenders on the data centers that power artificial-intelligence systems all said in recent days that they would jack up investments further in 2025 after record outlays last year. Microsoft , Google and Meta Platforms have projected combined capital expenditures of at least $215 billion for their current fiscal years, an annual increase of more than 45%.
Amazon.com didn’t provide a full-year estimate but indicated on Thursday that total capex across its businesses is on course to grow to more than $100 billion, and said most of the increase will be for AI.
Their comments in recent quarterly earnings reports showed the AI arms race is still gaining momentum despite investor anxiety over the impact of China’s DeepSeek and whether these big U.S. companies will sufficiently profit from their unprecedented spending spree.
Investors have been especially shaken that DeepSeek replicated much of the capability of leading American AI systems despite spending less money and using fewer and less-powerful chips, according to its Chinese developer. Leaders of the U.S. companies were unbowed , touting advances in their own technology and arguing that lower costs will make AI more affordable and grow the demand for their cloud computing services, which AI needs to operate.
“We think virtually every application that we know of today is going to be reinvented with AI inside of it,” Amazon Chief Executive Andy Jassy said on Thursday’s earnings call.
Here is a breakdown of each company’s plans:
Amazon said a measure of its capex that includes leased equipment rose to a record of about $26 billion in the final quarter of 2024 , driven by spending in its cloud-computing division on equipment for data centers that host AI applications. Executives projected it would maintain the fourth-quarter spending volume in 2025, meaning an annual total of more than $100 billion by that measure.
The company—which gets most of its revenue from e-commerce and most of its profit from cloud computing—also projected overall sales for the current quarter that missed analysts’ expectations. Its shares slid about 4% in after-hours trading Thursday. The stock rose more than 40% in 2024 and was up nearly 9% this year before its earnings report.
Jassy said AI has the potential to propel historic change and that Amazon wants to be a leader of that progress.
“AI represents for sure the biggest opportunity since cloud and probably the biggest technology shift and opportunity in business since the internet,” Jassy said.
Google shares are down about 7% since its earnings report Tuesday, which showed disappointing growth in its cloud-computing business. Still, parent-company Alphabet said it is accelerating investments in AI data centers as part of a surge in capital expenditures this year to about $75 billion, from $52.5 billion in 2024. The spending will go to infrastructure both for Google’s own use and for cloud-computing clients.
“I think part of the reason we are so excited about the AI opportunity is we know we can drive extraordinary use cases because the cost of actually using it is going to keep coming down,” said CEO Sundar Pichai .
AI is “as big as it comes, and that’s why you’re seeing us invest to meet that moment,” he said.
Microsoft has said it plans to spend $80 billion on AI data centers in the fiscal year ending in June, and that spending would grow further next year , albeit at a slower pace.
Chief Executive Satya Nadella said AI will become much more extensively used , which he said is good news. “As AI becomes more efficient and accessible, we will see exponentially more demand,” Nadella said.
Growth for Microsoft’s cloud-computing business in the latest quarter also disappointed investors, leaving its stock down about 6% since its earnings report last week.
Meta, too, outlined a sizable increase in its investments driven by AI, including $60 billion to $65 billion in planned capital expenditures this year, roughly 70% higher than analysts had projected. Shares in Meta are up about 5% since its earnings report last week.
CEO Mark Zuckerberg said investing vast sums will enable it to adjust the technology as AI advances.
“That’s generally an advantage that we’re now going to be able to provide a higher quality of service than others who don’t necessarily have the business model to support it on a sustainable basis,” he said.
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