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Manish Saini

Inflationary pressures continue to tighten Europe's monetary policy.

Despite recent improvements in global economic development, significant inflationary pressure in Europe has persisted. This endangers the continent's economic stability. As a result, numerous European governments seek assistance from the European Central Bank. Despite Europe's big inflationary shock over the last two years, the eurozone's annual inflation rate remains below the European Central Bank's 2% objective. This is mostly due to external economic shocks.

Concerns have also been raised about the growth in energy prices. Energy accounts for almost one-sixth of the eurozone price index. However, the underlying inflation rate has been constant over the last year. As a result, there is a large difference between headline and core inflation rates. Nonetheless, the ECB looks committed to carrying out its primary mandate of price stability. It stated that it would cease purchasing government bonds in the third quarter of 2022. It has also hiked three-quarters of a percentage point of its three main interest rates.

Despite the inflationary shock, the eurozone economy grew by 0.2% in the third quarter. This is the smallest growth rate since 2012. However, the eurozone economy is forecast to increase by at least 0.8% in the fourth quarter. Despite the quick recovery from the COVID-19 epidemic, Europe is confronted with two policy issues. The first is to diminish fiscal assistance for the economy, while the second is to combat inflation more forcefully.

Since the COVID-19 epidemic, the eurozone's inflation disparities have widened. Until early 2019, these discrepancies were minor. However, they have grown, and the spreads have been at their greatest since 2002. Causes mostly cause the rise in inflation rates and spread beyond central banks' control. Higher energy prices, commodity and service prices, and a sharp spike in oil prices have contributed to rising prices.

However, the swift recovery in demand is also driving up costs. This is seen in international trade as well. Furthermore, the asymmetric consequences of the energy cost spike increase the inflation spread. The European Central Bank's monetary policy has eased lending conditions for families and businesses. However, the impact of these policies may be greater in certain member countries than in others. This can lead to competitive distortions.

A series of supply-side shocks in the last year has hit the European Union. These shocks have resulted in slower growth and higher food and energy prices, reducing real earnings and driving inflation. The European Central Bank (ECB) has tightened monetary policy in response. The ECB intends to raise its deposit rate by 25 basis points in September.

High inflation has prompted the ECB to return to a tightening posture. Large levels of surplus savings have aided this. German inflation dynamics have also influenced it. The ECB's mission is to restrain credit expansion while suppressing inflation. Both demand-side and supply-side shocks cause high inflation. High levels of surplus savings and the subsequent reopening of the economy have fueled pent-up demand. As a result, price shocks have been more quickly absorbed.

Rising costs have impacted households throughout the world. Energy and food price increases have reduced real earnings and hampered domestic demand. They have also precipitated a worldwide cost-of-living issue. Despite a bleak growth expectation in the aftermath of the global financial crisis, Europe is experiencing a solid economic rebound. In the eurozone, inflation has risen in recent months, although it remains modest. Nonetheless, the ECB will face difficulties meeting its medium-term aim of 2%.

Supply-side frictions have accompanied the current inflationary increase. Lockdowns in East Asia and China have disrupted commerce, causing prices to rise in local and international markets. Supply-demand imbalances should diminish by 2022, improving the outlook for consumption. Several growing European economies are on course to recover output levels comparable to those before the epidemic, although with some policy changes. Employment has also recovered, although some people are still losing money.

The United Kingdom was particularly hard struck by the pandemic's initial wave, although it is on course to recover more quickly. The labour market in the service and manufacturing sectors is robust. Short-term threats include interruptions in gas and oil supply, as well as prolonged economic instability. However, the probability of the second round of consequences in many sophisticated European countries is modest.

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