‘Stagflation’ haunts eurozone as price rises soar to record highs

THE eurozone is tumbling into a period of “stagflation” as growth slows to a trickle even as inflation hits new record highs.

The dreaded combination poses challenges for governments and central banks as they fight to stop prices rising further out of control but risk causing a recession if they hike rates to counter inflation. Annual price rises across the EU hit 7.5pc this month, while GDP growth slowed to 0.2pc for the first quarter, according to Eurostat.

It comes amid a rift between EU nations on how to respond to Russia’s invasion of Ukraine, with Poland and France keen to stop importing oil and gas from the pariah state, while Germany has proved more reluctant to risk a recession by forgoing vital supplies. But after weeks of resistance, Germany appears to have dropped its opposition to sanctions on Russian oil.

Energy prices have soared by 38pc, food, alcohol and tobacco increased 6.4pc and other goods and services rose by more than 3pc, all well ahead of the European Central Bank’s inflation target of 2pc.

Among the major economies prices are rising fastest in Spain at 8.3pc, followed by Germany at 7.8pc. Across the entire eurozone inflation is most severe in the Baltics with prices up 19pc in Estonia, 16.6pc in Lithuania and 13.2pc in Latvia.

When it comes to GDP growth, Germany dodged a recession by growing 0.2pc in the first three months of the year, recovering modestly from the 0.3pc contraction at the end of 2021.

But the French economy ground to a halt and Italy went into reverse with GDP falling by 0.2pc.

Holger Schmieding, chief economist at Berenberg Bank, said this is the result of Russia’s invasion of Ukraine.

“Russia’s brutal war against Ukraine has driven up prices for energy and foodstuffs, disrupted supply chains and dealt a serious blow to consumer confidence,” he said. “Worsening Chinese lockdowns and cautious consumer spending in reaction to high energy and food prices could easily cause a temporary contraction in eurozone GDP in the second quarter.”

While an immediate embargo on gas imports is seen as unlikely, oil, however, could soon be blocked.

Economists meanwhile expect the European Central Bank to bring foreward its first move to raise interest rates from their current level of minus 0.5pc.