Highest inflation since introduction of the euro piles pressure on Christine Lagarde

Lagarde

Pressure is mounting on Christine Lagarde, the European Central Bank chief, to get a grip on soaring prices on the Continent as inflation hit its highest level since the birth of the euro.

Figures showed eurozone inflation hit 4.9pc in November, far worse than the 4.5pc expected, as energy costs jumped a record 27pc compared with last year.

Ms Lagarde has insisted that the inflation surge is a one-off but that stance is coming under increasing pressure from hawks such as Germany, where prices are rising at the fastest pace for almost 30 years.

Even stripping out volatile energy prices, the figures showed inflation in the single currency bloc of 2.6pc – well above the ECB’s 2pc target – as companies across Europe also grapple with the post-Covid supply chain disruption increasing cost pressures.

Charles Hepworth at GAM Investments said: “It may be wishful thinking on the part of Lagarde when she declares that price pressures won’t run out of control – they already are and it’s difficult to follow the argument that it will abate soon.”

The ECB is poised to announce the end of its €1.85 trillion pandemic bond-buying plan from March, but more lingering inflation has sparked calls for a swifter exit from the emergency stimulus.

Jonas Keck, economist at the Centre for Economics and Business Research, said the price would test the ECB’s resolve on sticking to the 2pc target.

Christoph Weil, senior economist at Commerzbank, added that inflation in the first half of next year was likely to be “significantly higher” than the ECB had previously feared and take longer to return to target.

“Even if the rate is distorted upwards by special effects, it nevertheless shows that underlying price pressures have increased noticeably as a result of the supply bottlenecks,” he said.

The price shock is widening European splits between the inflation-wary Bundesbank, whose outgoing president Jens Weidmann has warned that prices are running out of control, and southern European states urging central bankers to keep their foot on the accelerator.

Spain’s central bank chief, Pablo Hernandez de Cos, warned against premature removal of support despite inflation hitting a 30-year high of 5.6pc, claiming that prices would ease “very significantly” next year.

Despite the inflation shock, Europe has been brought to its knees by a resurgence of the virus, which triggered a full lockdown in Austria and Slovakia as well as new curbs in Germany and Netherlands even before the emergence of the new omicron variant.

Analysts at Goldman Sachs expect the new restrictions to dent eurozone growth by a cumulative 0.4 percentage points over the current quarter and the first three months of next year. That is equivalent to some £45bn wiped off the region’s £11.3 trillion economy.

However, the investment bank added that if the new variant caused tougher measures the economic blow could be as much as £150bn.

It warned: “We see downside risks to this base case, given the risk of continued pressure on hospital capacity and the uncertainty implied by the Omicron variant. In our downside scenario, we assume a return to nationwide lockdowns for three months and assume a higher sensitivity of activity to lockdowns. In such a scenario, we would expect a cumulative hit of 1.4pc to euro area GDP.”