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EU Hikes Inflation Forecast to 8.3% for 2022 as Russia-Ukraine War Drives Soaring Prices

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  • In May, the European Commission expected inflation in the euro area to hit 6.1% in 2022, before falling to 2.7% in 2023. Now, both forecasts have been revised up to 7.6% and 4%, respectively.
  • For Europe as a whole, the inflation forecasts have been revised up from 6.8% in 2022 and 3.2% in 2023, to 8.3% and 4.6% respectively.
  • Many economists are pricing in a recession for the euro zone either later this year or in 2023, but — for now at least — European officials are refusing to talk about the possibility of a recession.

Inflation will hit 7.6% in the euro zone and 8.3% in Europe this year, according to revised forecasts, as Russia's invasion of Ukraine puts a dampener on the region's economies.

Thursday's forecasts from the European Commission, the executive arm of the EU, come as markets monitor inflation prints closely. In the U.S., the consumer price index rose 9.1% on the year in June, according to numbers released Wednesday — coming in much higher than economists had expected.

Concerns over record-high price rises are also widespread in Europe, where the latest reading showed that inflation hit a record rate of 8.6% in the euro zone in June.

The situation is piling pressure both on national governments, which are trying to reduce the impact of higher prices on households, and the European Central Bank, which is due to meet next week.

Back in May, the European Commission said it expected inflation in the euro area to hit 6.1% in 2022, before falling to 2.7% in 2023. Now, both forecasts have been revised up to 7.6% and 4%, respectively.

For Europe as a whole, the inflation forecasts have been revised up from 6.8% in 2022 and 3.2% in 2023, to 8.3% and 4.6% respectively.

"Moscow's actions are disrupting energy and grain supplies, pushing up prices and weakening confidence," Paolo Gentiloni, Europe's economics commissioner, said in a statement.

"Record-high inflation is now expected to peak later this year and gradually decline in 2023. With the course of the war and the reliability of gas supplies unknown, this forecast is subject to high uncertainty and downside risks," he added.

European officials fear a complete shutdown in gas supplies from Russia. Though the bloc has gradually been reducing its purchases of Russian gas, these imports still represent an important source of energy for the bloc — most notably for sectors which use gas as a raw material, such as the chemicals sector.

Pipeline operator Nord Stream AG confirmed earlier this week that maintenance work at its Nord Stream 1 is underway until July 21. The pipeline is crucial in the transportation of Russian gas to Germany and beyond, however there are concerns that flows will not return to normal levels after the works are concluded.

Speaking to CNBC Thursday, Gentiloni said: "In a complete cut of gas scenario, there is indeed a risk to enter into a negative territory, specially within the year figure."

Lower growth expectations

The commission also revised down most of its growth expectations in its summer economic forecasts, published Thursday.

In May, it said it expected a growth rate of 2.7% this year and 2.3% next year for both for the EU and the euro area.

Now, it now expects Europe's economy to grow by 1.5% next year, while the euro zone is seen expending by 2.6% in 2022 and 1.4% in 2023.

Europe has been big hard by Russia's invasion of Ukraine. At the start of the year, some were expecting the euro area to grow at more than 4% — a faster pace than the United States.

However, tough sanctions on Russia, a reduction in flows of natural gas, major food supply chain issues and a slew of other factors have shaken the economic prospects of the bloc.

Many economists are pricing in a recession for the euro zone either later this year or in 2023, but — for now at least — European officials are refusing to talk about the possibility of a recession.

Italy in focus

Italy is once again in focus amid the possibility of fresh political chaos.

One of the coalition parties in Rome has threatened to boycott a vote on a new government package and Prime Minister Mario Draghi has threatened to resign if that's the case. This could tip the country into a new political crisis and potentially fresh elections.

"We like very much having as an interlocutor a government led by Mario Draghi and I think this is in the interests of the European Union and of Italy," Gentiloni, a former prime minister of Italy, told CNBC.

The commission said Thursday that Italy will grow 2.9% this year, but only 0.9% next year.

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