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Cost of Living

Soaring energy prices lead to record Eurozone inflation as Gazprom suspends gas to Germany

The European Central Bank is expected to raise interest rates at its next meeting on 8 September.

HE EUROZONE INFLATION rate hit a new record in August, official data has shown, increasing pressure on the European Central Bank to hike rates to tame Ukraine war-fuelled prices.

Driven by soaring energy prices caused by Russia’s invasion in Ukraine, the yearly inflation rate in the 19-country single currency area reached 9.1%, its highest since records began, according to Eurostat.

Consumer prices had accelerated to 8.9% in July.

The president of Germany’s powerful federal central bank, Joachim Nagel, immediately declared that the ECB should plan for a “strong rise in interest rates for September”.

“Otherwise, inflation expectations could become permanently entrenched above our target of two percent,” he warned.

The headline rate has been rising since November 2021, amid global supply chain stresses. War erupted in Ukraine in February and the European summer was marked by a drought that helped force up food prices.

The ECB is expected to raise interest rates at its next meeting on 8 September, after first increasing them in July for the first time in a decade. Rates had been kept low as Europe emerged from its coronavirus slump.

France, which has moved to cap energy prices saw the lowest rate within the eurozone, with 6.5% in August, according to Eurostat.

But powerhouse Germany was high on 8.8%, Italy saw 9% and Spain 10.3%.

Russia’s neighbours on the Baltic, Estonia, Lithuania and Latvia suffered the most, at 25.2%, 21.1% and 20.8%, respectively.

Economist Jack Allen-Reynolds of Capital Economics warned that the eurozone inflation rate could hit 10% by the end of the year, even if the bank hikes rates.

“The balance of probabilities is shifting towards a 75 basis points hike next week,” he said. The ECB raised rates by 50 basis points in July, from a zero interest rate to 0.5%.

 Among the items in the eurozone inflation basket, energy prices once again experienced the highest annual increase in August, although they slowed slightly to 38.3% compared to 39.6% in July.

Food prices including alcohol and tobacco increased by 10.6%, from 9.8% in July. Industrial goods and services increased by 5% and 3.8%, also accelerating compared to the previous months.

Gazprom halts supply

The new inflation record comes as Russian energy giant Gazprom suspended gas deliveries to Germany on a major pipeline today, the latest in a series of supply halts that have fuelled the energy crisis in Europe.

Gazprom said supplies via Nord Stream 1 were “completely stopped” for “preventative work” at a compressor unit, shortly after European gas network operator ENTSOG announced that deliveries had ceased.

Gazprom has also said it would suspend gas supplies to France’s main provider Engie from Thursday after it failed to pay for all deliveries made in July.

European countries have faced soaring energy prices since Russia invaded Ukraine in late February and subsequently curbed its gas deliveries to the region. Germany, which is heavily dependent on Russian gas, has accused Moscow of using energy as a “weapon”.

But Gazprom has said the three-day maintenance work was “necessary” and had to be be carried out after “every 1,000 hours of operation”.

Germany’s Federal Network Agency chief Klaus Mueller has called it a “technically incomprehensible” decision, warning that it was likely just a pretext by Moscow to wield energy supplies as a threat.

Experience shows that Moscow “makes a political decision after every so-called maintenance”, he said, adding that “we’ll only know at the beginning of September if Russia does that again”.

The European Union is preparing to take emergency action to reform the electricity market in order to bring galloping prices under control, with energy ministers scheduled to hold extraordinary talks next week.

Asked if gas supplies would resume after the three-day works were completed on Saturday, Russian government spokesman Dmitry Peskov said “there is a guarantee that, apart from technical problems caused by sanctions, nothing interferes with supplies”.

Western capitals “have imposed sanctions against Russia, which do not allow for normal maintenance, repair work”, he added, in what appeared to hint at a replay of an earlier round of start-stop rigmarole.

Gazprom had already carried out 10 days of long-scheduled maintenance works in July. While it restored gas flows following the works, it drastically dwindled supplies just days later, claiming a technical issue on a turbine.

A day ahead of the new shutdown, Chancellor Olaf Scholz said Germany was now “in a much better position” in terms of energy security, having achieved its gas storage targets far sooner than expected.

Germany’s gas storage tanks were now almost at 85 percent of capacity, said Mueller, assessing that “Germany is better prepared for the new ‘maintenance’ by Nord Stream”.

Europe as a whole was also getting a march on filling its gas storage tanks. On Sunday, storage levels were already at 79.9% of capacity in the EU.

 ’Gas emergency’

At the same time, fears over throttled supplies have also driven companies to slash their energy usage.

Germany’s industry consumed 21.3% less gas in July than the average for the month from 2018 to 2021, said the Federal Network Agency.

Mueller has said such pre-emptive action “could save Germany from a gas emergency this winter”.

And Europe’s biggest economy was already racing to turn its back on Russian gas.

At the German coastal city of Lubmin, where Nord Stream 1 comes onshore, plans are already well underway for the switch to liquefied natural gas (LNG).

The LNG, transported in by ships, will arrive at Lubmin’s industrial port and be converted back into gas and pumped into Gascade’s distribution network, which has so far been used to funnel Russian gas around the country.

“We expect to be able to inject gas into the distribution network on 1 December,” said Stephan Knabe of Deutsche ReGas — the company managing the LNG project.

© AFP 2022

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