Amid the relentless surge in US inflation to a four-decade high of 7.5 percent, the European Commission on Thursday raised inflation expectations for this year.

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The Brussels-based institution forecast inflation to touch 3.5 percent this year against its November forecast of 2.2 percent. Higher energy prices are expected to exert a “more protracted drag” on the European economy and drive inflation higher, the latest growth outlook of the European Commission revealed.

Earlier this year, economists said high inflation would continue to haunt the world economy this year. In a Reuters poll, economists drifted from their previous view that the surge in inflation, driven by pandemic-induced supply constraints, was transitory. The survey was conducted in January and over 500 economists participated in it. Apart from trimming their global growth outlook on expectations of slowing demand, the economists also said central banks would raise rates faster than assumed earlier. According to the survey, growth is seen slowing to 3.6 percent and 3.2 percent in 2023 and 2024, respectively.

What is happening in the US?

In the US, the labour department on Thursday said inflation reached its highest level in January at 7.5 percent since February 1982. Consumers felt the bite of price rises in a number of household items such as food, vehicles, appliances and electricity. There was a sharp uptick in housing rentals as well. Apart from the heavy flow of federal aid, supply bottlenecks, shortage of workers, ultra-low interest rates and robust consumer spending had contributed to the rise in inflation.

While most economists believe inflation will ease when businesses adapt and demand normalises, there is still no clear indication as to when supply snarls would ease enough to take pressure off prices. The relentless price rise has prompted the US Federal Reserve to consider raising rates earlier than it had previously planned.

“With wages, commodity prices and supply-chain strains all contributing, the Fed will need to respond aggressively,” James Knightley, chief international economist at ING, told The Wall Street Journal.

Europe gears up

Europe is witnessing an energy crunch pushing electricity prices to record highs, fueling inflation and raising household bills. Power prices in Germany and France have surged almost 11 percent and 7.7 percent, respectively, amid higher demand from European utilities in the freezing winters, Bloomberg had reported last year.

Amid the surge in energy prices, the European Commission hiked inflation forecast to 3.5 percent in the Eurozone.

Although output in the 27 member states of the commission is expected to surpass pre-pandemic levels by the end of this year, the surge in inflation in the Eurozone to record levels in the fourth quarter had cast a cloud over the economic outlook for the coming months.

“Multiple headwinds have chilled Europe’s economy this winter: the swift spread of Omicron, a further rise in inflation driven by soaring energy prices and persistent supply chain disruptions,” Financial Times quoted Paolo Gentiloni, the EU’s economy commissioner, as saying.

Once these headwinds fade, growth is likely to pick up by spring, Gentiloni said.

Russia inflation at 6-year high

Inflation in Russia hit a six-year peak in January at 8.73 percent driven by increase in prices of fruits, vegetables, construction materials and electronics, Bloomberg reported quoting data by the Federal Statistics Service.

Price gains in the week ended February 4 were higher at 0.29 percent than 0.18 percent in the previous week, pushing the annual rate to 8.8 percent as on February 4. The country’s central bank is likely to increase rates after Friday’s meeting as a 425-basis points (bps) hike over last year failed to reverse the trend in price growth.

“The inflation peak most likely hasn’t passed yet,” Bloomberg quoted Dmitry Polevoy, economist at Locko-Invest, as saying. “Most likely, it will come in March-April.”

RBI’s projection

Retaining its inflation projection at 5.3 percent for the ongoing financial year, the Reserve Bank of India on Thursday said it expects inflation based on consumer price index to come down below 4.5 percent in FY 2023. Although global crude oil prices are likely to play truant, inflation is likely to come down on the back of better crop arrivals, supply-side interventions and a good monsoon.

In December, retail inflation in India rose to a five-month high of 5.59 percent against 4.91 percent in November on the back of an uptick in food prices, PTI reported.

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(Edited by : Thomas Abraham)