The recovery of the euro area continues and inflation hits its highest level in 13 years

The euro zone economy continued to grow during the summer as the region recovered from two successive recessions, data released on Friday showed. But this recovery is hampered by supply chain bottlenecks and labor shortages that are driving up prices. The annual inflation rate jumped to 4.1% in October, according to a separate report.

“The first effects of the recovery are waning, which will naturally slow GDP growth,” says Bert Colligen, an economist at ING Bank.

This matches the highest inflation rate ever in the eurozone, which was last recorded in mid-2008, according to data from the European Statistics Agency.

In the previous month, inflation rose by 3.4% compared to a year ago. Among the main drivers of inflation are the surge in natural gas prices caused by several factors, including low inventories, disappointing supply from Russia and demand from China. Energy prices rose nearly 24 percent in October from the previous year.

Eurozone GDP also rose by 2.2% in the third quarter, a slightly faster pace of growth than the previous quarter's 2.1%, the region's statistics agency also reported Friday.

The economy is recovering from its slump at the end of 2020 and in the first quarter of this year, when a second wave of the coronavirus pandemic led to tight social restrictions across the region.

With businesses reopening and consumers returning to restaurants and travel, economic output is expected to exceed its pre-epidemic level by the end of the year, according to the European Central Bank.

"From now on expect things to soften up," Bert Colligen, an economist at ING Bank, wrote in a note to clients. "The first effects of the recovery are waning, which will of course slow down GDP growth. In addition, the shortage of inputs and supply chain problems add to the problems of manufacturing," he added.

European Central Bank President Christine Lagarde: “I am confident that the factors driving prices higher, including the mismatch between supply and demand, are temporary, and that inflation will ease over the next year.”

Last Thursday, Christine Lagarde, President of the European Central Bank, said she expects the economic momentum to slow, as the bank decided to keep its accommodative monetary stance unchanged. She added that rising inflation and supply chain bottlenecks will continue for longer than initially expected, but officials are confident that they will subside over the next year.

"We've done a lot of self-examination to test the analysis," Lagarde said last Thursday about the central bank's study of inflation.

She is confident that the factors driving prices higher, including the mismatch between supply and demand, are temporary, and that inflation will ease over the next year.

"It is recognized that it will take a little longer than we expected," she said.