On January 7, Eurostat, the statistical office of the European Union (EU), reported that the annual inflation in the eurozone has surged up to five percent, marking the highest rate ever since records began in 1997. The European debt crisis, also referred to as the eurozone crisis, poses a constant threat not just to the European community, but to the global economy. The unfolding events of the eurozone crisis have notably been affected under the influences of the coronavirus disease (COVID-19), and the current inflation levels have raised questions regarding European Central Bank’s (ECB) monetary policy on interest rates. Nevertheless, ECB asserts that it is very unlikely to raise interest rates as it expects the rising inflation to fall back to its two percent targeted rate over the course.

On November 11, 2021, the European Commission (EC) raised its economic outlook for 2022, forecasting that the eurozone economy will grow faster as it recovers from COVID-19. However, it has lowered its expectations, claiming that unstable energy prices will adversely affect various utility bills, as well as people's purchase and investment abilities. Paolo Gentiloni, European Commissioner for Economy, held a press conference where he stated, “The EC has a very positive economic outlook, but the degree of uncertainty is far too high.” Gentiloni further mentioned, “The European economy is moving from recovery to expansion but is now facing some headwinds.”

Pressures on the ECB

The Eurozone inflation, as in many other regions of the world, has become apparent in recent months as the global economy has been slowly recovering from the COVID-19 pandemic. While the demand for energy needed to operate factories intensified, imports of natural gas from Russia and other countries were uneven, which fueled a surge in prices. Market experts expect the imbalance in energy supply and demand to rise, and that as energy prices accelerate, overall inflation in living prices such as food and services will occur. Moreover, there are concerns that if the government decides to provide energy subsidies with finances to reduce the burden on households and businesses, it could further encourage inflation. As inflation rates in the eurozone have soared to an all-time high, disputes were raised as to how the ECB should address the pressures of the situation.

Increased inflation rates in the eurozone pose a great challenge for the ECB, especially regarding whether it should take an aggressive stance in its monetary policies to combat the rising prices. Despite these concerns, the ECB has decided to keep prices stable as imposing higher interest rates would not solve the imbalance between supply and demand. It claims that the current inflation rate will decline over the coming years. The current President of ECB, Christine Lagarde, reaffirmed that “ECB is unlikely to raise its key interest rates next year,” adding that it will gradually reduce bond purchases before adjusting its interest rates. The ECB expects the inflation rate to fall back under two percent by the end of the year and maintain its rate at around 1.8 percent in 2023 and 2024. However, questions arise as to whether the outlook of the situation is actually possible.

Outlook of the Current Inflation

The British business magazine Financial Times (FT) has asserted that although this year’s global economy would continue to recover, the ongoing uncertainties of the pandemic make it difficult to predict variables that may shake the economy again. In an economic outlook report released by the Organization for Economic Co-operation and Development (OECD) last December, it anticipated that the global economy would continue to recover slowly from this year. Inflation rates of major countries are expected to fall slightly lower than the previous year, only based on the “optimistic” premise that the global economy is adapting to the COVID-19 pandemic.

However, if the virus continues to spread again, the price outlook could be missed. According to Professor Kang Yoo-Duk (Language and Trade, Hankuk University of Foreign Studies), economic growth may collapse as the current spread of the Omicron variant poses a major threat to economic recovery in 2022. Disruptions in production and the supply chain would cause upward pressure on prices, leading to an economic recession once again. Moreover, FT’s chief economist Martin Wolf claimed that “last year's high inflation rate may turn out to be a temporary phenomenon, but the core inflation could remain, or rise higher.” In other words, even if the supply shortage of energy subsides, inflation pressures on the demand side, such as a raise in wages, may intensify, making it difficult to effectively rule out worse-case scenarios of long-term inflation rates.

However, inflation is not just the EU’s problem. South Korea’s inflation rate in December 2021 grew up to 2.5 percent, recording the highest rate of increase in 10 years. Following the increase, the Bank of Korea (BOK) decided to raise its base rate of interest to 1.25 percent. Professor Kang went on to explain that this would inevitably affect domestic investment and consumption where it can also become a burden on soaring household debt. Professor Kang believes that it would be necessary to closely monitor inflation rate trends in developed countries, along with preparations of debt management for individuals and corporates as concerns over global inflation rise.

Ever since the outbreak of the COVID-19 pandemic, countries have launched easing monetary policies including a massive cut in the benchmark interest rate, raising prices to fight the soaring inflation prices. Currently, economists’ attention is focused on whether the recent inflation trend is at a serious level and how long it will continue. Among analysts, the prevailing view is that it is currently a risk factor that needs close attention until 2023, rather than it being just a temporary phenomenon occurring during the economic recovery period. Rises in inflation caused by various demands, global supply chain instability, and production disruptions induced by the COVID-19 pandemic seem difficult to resolve in a short time. The challenging outlook of inflation matters as a concern not just to Europe, but the global community as well.