Europe Faces Record High Inflation

The latest data from Eurostat shows that the inflation for June has reached 8,6% (annual) in the euro zone. The surging inflation can be attributed to post-COVID supply chain issues and uncertainty in the energy sector following Russia’s invasion of Ukraine.

The cost of food, alcohol, and tobacco is exploding with the annual inflation rate of 9%. Industrial goods and services face 4,2% and 3,4% inflation hikes respectively. 

The Baltic states seem to have taken the brunt of the hit. Reported inflation in Lithuania is at 20,5%, 19% in Latvia, and 22% in Estonia.

The European Central Bank (ECB) is expected to hike the interest rates for the first time in 11 years. The first hike is planned for July and again in September. It is likely that ECB’s main interest rates will enter the positive territory for the first time in 8 years.

This could prove to be an issue as the recession looks to be coming in even without ECB’s input. Raising the interest rates would slow down the euro zone economy even further. Economists forecast an incoming recession in euro zone countries in 2023 with GDP shrinkage of 0,8%. The interest rate hike could trigger the recession by the end of 2022.

Economists are divided in whether hiking the interest rates to manage inflation is a risk worth taking in the face of an economic slowdown.

How can you hedge against inflation and recession? A good idea is to diversify your investments and look at markets that are not as affected as your own. Look at investing in Treasury inflation-protected securities (TIPS). Look at the real estate market which historically is stable and which assets are tangible.