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ECB: Reaching full capacity of the economy will accelerate inflation

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Eurozone companies are increasingly confronted with capacity constraints that will accelerate inflation, according to the report of the European Central Bank (ECB). This prospect should provide some consolation to the governors as they prepare to decide whether to stop their bond purchase program this year as planned. A series of disappointing figures show that the Eurozone economy is losing momentum, and new data from Monday shows that investors’ moods are weakest for over two years.

“The Eurozone economy is expanding faster than estimates of its long-term potential, leading to a gradual overcoming of economic stagnation”, says the the ECB report said. “Supply constraints are expected to have an increasing impact in the future, which will contribute to a gradual increase in wage growth and underlying inflation. The continued economy expansion seems to have largely taken over the spare capacity created by the global financial crisis and the sovereign debt crisis”, adds the bank.

The ECB report came shortly before the release of the investors confidence index of Sentix, which plunged to 8.8 points – the lowest reading since October 2016. Last week’s data showed that the Eurozone economy has expanded by 0.2% in the third quarter – half the pace expected by economists.

At the same time, inflation accelerated in October, supported by higher energy costs, and pressure on basic prices is also rising. The ECB will hold its last monetary policy meeting this year on December 13th.

Analysts say potential growth is backed by widening labor power, declining unemployment and stronger growth. The capital formation has accelerated, but remains weaker than pre-crisis levels.