Eurozone inflation set new record in May, rising to 8.1%

Eurozone inflation hit a record 8.1 per cent in May, amid surging energy and food costs fuelled in part by Russia's war in Ukraine.

Annual inflation in the 19 countries that use the euro soared past the previous record of 7.4 per cent reached in March and April, according to the latest numbers published Tuesday by the European Union statistics agency, Eurostat.

Inflation in the eurozone is now at its highest level since record-keeping for the euro began in 1997.

Soaring prices are weighing on household finances and making it more urgent for officials to act quickly to head off further increases in the cost of living.

War in Ukraine a factor behind rising prices

Energy prices jumped 39.2 per cent, highlighting how the war and the accompanying global energy crunch are making life more expensive for the eurozone's 343 million people.

"Energy inflation is likely to remain higher for longer than previously expected" after the European Union agreed to embargo most Russian oil imports by the year's end, said Andrew Kenningham, chief Europe economist at Capital Economics.

Brent crude oil, the international standard, rose to $120 US a barrel after the agreement. Aimed at punishing Moscow for its war with Ukraine, the embargo deal is a double-edged sword that could also cause pain for people and businesses already struggling to cope with higher energy costs.

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Oil and natural gas prices had also spiked over fears the war would interrupt supplies from Russia, the world's largest oil exporter. Strong global demand following the COVID-19 pandemic, and a cautious approach to increasing production from oil cartel OPEC, have lifted energy prices.

Countries neighbouring Russia that have been weaning themselves off Russian gas were among the hardest hit. Estonia's inflation rate reached 20 per cent, while in Lithuania it was 18.5 per cent and in Latvia it came to 16.4 per cent.

Food, alcohol and tobacco prices rose 7.5 per cent in May, Eurostat said — another sign of how Russia's war in Ukraine, a major global supplier of wheat and other agricultural commodities, is pushing up prices around the world. Prices for goods like clothing, appliances, cars, computers and books rose 4.2 per cent. Prices for services increased 3.5 per cent.

Inflation is also a problem in other large economies, like Britain and the U.S., where it's at the highest level in four decades.

Pressure on to raise interest rates

In Poland, which doesn't use the euro, annual inflation in May jumped to a 24-year high of 13.9 per cent, the state statistical office said Tuesday. Higher fuel and food prices were the main drivers amid an economic boom prompted by the huge influx of Ukrainian refugees contributing to consumer demand.

The latest figures add pressure on eurozone officials to raise interest rates from ultra-low levels to rein in rising prices, though that risks stifling economic recovery. The European Union earlier this month slashed its economic growth forecast for the 27-nation bloc amid the prospect of a drawn-out Russian-Ukraine war and extended disruptions to energy supplies.

Last week, the president of the European Central Bank, Christine Lagarde, gave the clearest sign yet that rates will start rising soon, writing on a blog that she expects to "exit negative interest rates by the end of the third quarter."