Inflation in the euro area rises to 3.3 percent – ECB has to raise interest rates

Inflation is far too high. Inflation in the euro area rose from 2.9 percent in July to 3.3 percent in August. Commerzbank economists speak of an “inflation jump”. In the first euro countries the rate is now above five percent, in others above four percent. The euro area's overall inflation rate has been above the European Central Bank's target of two percent for six months.

Inflation is not going away anytime soon

One could object: It is primarily energy prices that drive inflation. Inflation has reached the extraordinary level of 14.3 percent. However, a second source of price increases is now emerging: poor harvests due to drought have driven up prices for many agricultural products on the raw material markets. You can already see in the inflation figures that prices for “unprocessed foods” rose more sharply in August than in July. A drastic example from Germany is heads of lettuce, which have increased in price by 30 percent.

Core inflation was 2.4 percent in August, down from 2.5 percent in July. It measures inflation without the strongly fluctuating prices for energy and food. Central bankers are looking at this for the longer-term trend. The fact that the core rate has not increased further is a good sign; the fact that it stubbornly remains above two percent is a bad thing. The Ifo Institute now expects a significantly higher inflation of 3.0 percent for Germany next year.

ECB must show independence

It's high time for the ECB to raise interest rates next week. There is a special challenge here. In many countries, government bond yields have risen sharply. It will become more expensive for states to take on debt. In addition to higher inflation and interest rate expectations, concerns about the sustainability of government finances are also mixed into bond investors' calculations. This must not impress the central bankers. It is the core of their independence that they are not allowed to serve fiscal policy, but only pursue one goal: price stability. So: have courage, stay tough!