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Inflation Breaks Record in Europe as Harshest Winter in Decades Approaches

Inflación rompe récord en Europa

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As the harshest winter is just around the corner, inflation has just broken records in Europe as concerns grow over severe energy rationing due to gas shortages and dependence on Russian supplies.

On Friday, the European Union Statistics Agency announced that the annual inflation figure for the Eurozone countries was 10%—a rise in prices not seen since 1997.

For Germany, the inflation figure represents the highest price increase since 1951. Even so, Berlin does not bear the worst of the situation, as inflation in the Baltic countries is as high as 25 %, which is the case in Estonia, exceeding 22% in Lithuania and Latvia.

Following the invasion of Ukraine in February, Russia has used its control over gas supplies in Europe to pressure the European Union to withdraw its military and economic support for Ukraine in the conflict.

By attacking the gas lines in the Baltic Sea connecting Russian gas fields with Europe, the Nord Stream and Nord Stream 2 pipelines, and Russia’s forced annexation of the territories of Donetsk, Lugansk, Kherson and Zaporiyia, any opportunity to resume diplomatic and economic relations between the European Union and Russia is closed.

During the week, gas futures soared, anticipating that the gas shortage from Russia will worsen this winter.

Las escasez de petróleo y gas natural ha hecho que la inflación bata récord en Europa. (EFE)
Oil and natural gas shortages have caused inflation to hit record highs in Europe (EFE)

Russia has threatened to shut down the last gas line to Europe, which passes through Ukraine, in retaliation for a lawsuit against the Russian gas company Gazprom by the Ukrainian state-owned company NJSC Naftogaz, which accuses its Russian counterpart of defaulting on its payments since the beginning of the invasion. Russia has called the claim by Naftogaz “dishonest behavior.”

After the event, the natural gas future climbed 22%.

High energy costs are thus putting pressure on the prices of the manufacturing and service sectors, which have to pay higher energy rates in order to operate.

According to estimates by the Organisation for Economic Co-operation and Development (OECD), inflation in Europe by the end of the year will be 8.8% per year. The OECD estimates that Europe, in order to avoid energy rationing, will have to reduce its gas consumption by up to 10%.

The German government has said it will subsidize the price of gas and electricity for consumers and companies up to a certain level. Price controls can limit inflation in the short term, however, they come at the cost of prolonging it as they allow consumers to continue to demand goods and services in a time of scarcity.

Europa deberá reducir significativamente su consumo de energía para evitar un racionamiento durante invierno. (EFE)
Europe will have to significantly reduce its energy consumption to avoid winter rationing (EFE)

The European Central Bank (ECB) is also preparing for a new interest rate hike to control inflation on the demand by raising the cost of credit in the economy, which raises the cost of current consumption.

In September, the ECB raised interest rates by 0.75 %, something not seen before since the EU was formed, indicating that it plans to continue with the hikes.

Despite the actions of the ECB and European governments, forecasts indicate that during 2023 inflation will continue to be high affecting the cost of living in Europe.

Economist, writer and liberal. With a focus on finance, the war on drugs, history, and geopolitics // Economista, escritor y liberal. Con enfoque en finanzas, guerra contra las drogas, historia y geopolítica

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