Surging inflation likely to throttle European economic recovery as Ukraine conflict drags on

BRUSSELS, March 8 (Xinhua) -- Energy prices in Europe have been surging since the start of the Russia-Ukraine conflict, pushing inflation to a higher level and possibly denting Europe's hope that its economic recovery can pick up momentum in 2022.

SOARING INFLATION

Euro area annual inflation is expected to be 5.8 percent in February, beating the January reading of 5.1 percent, for a new record high, according to the statistical office of the European Union.

Energy, which saw a price surge of 31.7 percent, has been identified as the predominant contributor to inflation in February.

The Russia-Ukraine conflict compounded inflation pressures in Europe by driving up energy prices because of the fear that Russia, as a leading energy supplier, could curtail or even cut off its energy flows to Europe.

Petrol and diesel prices in Europe have been skyrocketing since the start of the Ukraine conflict. Drivers are paying more than two euros for one liter of fuel in Germany at present, more than 30 percent more than pre-conflict days.

As the Ukraine conflict rages on, the upward streak of energy prices, which rose by 28.8 percent in January, is set to continue.

GLOOMIER ECONOMIC OUTLOOK

The ongoing Ukraine conflict has clouded the outlook for the European economy. At a meeting attended by European economy and finance ministers last month, Paschal Donohoe, president of the Eurogroup and Irish finance minister, conceded that there would be economic costs for Europe as a result of the conflict.

Inflated energy prices and their ripple effect on food prices will inevitably gnaw away consumers' purchasing power.

Citing the impact of energy prices and uncertainties, European Central Bank (ECB) President Christine Lagarde said consumption and investment will probably be hurt by long periods of uncertainty, and economic growth will likely be hampered.

MONETARY POLICY CONUNDRUM

The ECB appears caught in a dilemma. There are expectations that the bank will pursue a tighter monetary policy to rein in surging inflation in the euro area. Still, such a move could dent economic confidence due to the uncertainties brought by the Ukraine crisis.

The ECB is poised to terminate its pandemic emergency purchase program in March and provide more clarity on its plan to further wind down stimulus in the coming governing council meeting due next Thursday.

On Wednesday, German Central Bank President Joachim Nagel said that the present monetary policy should be normalised given that inflation in Germany and the euro area will remain high.

However, ECB Executive Board member Fabio Panetta argued on Feb. 28 at a seminar that the bank's immediate priorities should be to protect the functioning of the financial sector and bolster confidence, keep in place the status quo and hold off on any further tightening.