Nevertheless, whether or not these reserves prove sufficient will depend on the weather conditions this coming winter, and on Europe’s ability to replace them as and when they are consumed. In short, the inflation pressures we had been experiencing due to the reopening of economies after the pandemic, the supply-side bottlenecks and the higher commodity prices have been exacerbated by the conflict with Russia, leading to extraordinary and persistently high rates. According to Eurostat,2 euro area annual inflation is expected to rise to 10% in September. This means that average inflation during the third quarter stood at 9.3%, a figure somewhat higher than anticipated in the ECB's last forecast exercise (9.1%).3 More importantly, euro area inflation is expected to remain above 9% during the fourth quarter. The rise in energy and food prices is the main factor behind the high levels of inflation in the region. The depreciation of the euro has also contributed to upward price pressures, particularly by increasing the price of commodity imports. Specifically, according to the flash estimate, the price increases over the past year in the energy and food components of the consumer price index stood at 37% and 11%, respectively, in September. These two components account for almost 70% of the increase in consumer prices in the euro area over the past year. Nonetheless, inflationary pressures are also spreading to the less volatile components of the consumer basket. Underlying inflation, which excludes food and energy consumer prices, is expected to hit 4.8% in September.
This is more than double the figure recorded at the beginning of the year (2.3% in January). In this case, certain pandemic-related factors may have facilitated a faster than expected pass-through of inflationary pressures. First, the bottlenecks I referred to earlier, which since 2021 have constrained the supply response to growth in demand. But also the strong demand for home renovation or, more recently, the rapid pace of resumption of activities involving more social contact, after two years of demand constraints.4 Moreover, the labour market has so far performed relatively robustly in Europe, an issue I will come back to later. In this context, and in view of the escalation of the energy conflict with Russia, we expect the inflationary episode in the euro area to be more intense and longer-lasting than we initially thought before the summer. This is reflected in the latest ECB staff forecasts, which, 2  https://ec.europa.eu/eurostat/documents/2995521/14698140/2-30092022-AP-EN.pdf/727d4958-dd57-de9f-996599562e1286bf 3  These projections were published on 8 September, with a data cut-off date of 22 August. 4  Pacce, del Río and Sánchez (2022). The recent performance of underlying inflation in the euro area and in Spain. Analytical Articles, Economic Bulletin, 3/2022, Banco de España. 2  in line with the OECD or Consensus Forecasts, have recently revised their inflation outlook significantly upwards. In particular, the ECB staff projections expect average inflation to reach 8.1% in 2022, before easing to 5.5% in 2023 and 2.3% in 2024.