Inflation in Europe slipped again in June, but fell too slowly to provide relief to price-complaining buyers or to halt further interest rate hikes that will raise the cost of borrowing across the EU. economy. Representative image of a shopper in a grocery store in Athens, Greece | Photo credit: AP
Inflation in Europe slipped again in June, but fell too slowly to provide relief to price-complaining buyers or to halt further interest rate hikes that will raise the cost of borrowing across the EU. economy.
The annual rate of 5.5% was down from 6.1% in May in the 20 countries that use the euro, the European Union’s statistics agency Eurostat said on Friday.
Although down sharply from October’s high of 10.6%, continued high prices in the US, Europe and the UK have pushed some of the world’s top central bankers world to make it clear that they are going to keep raising rates and leave them there until inflation drops to its 2% target that is considered best for the economy.
Consumers saw relief from energy prices, which fell 5.6% after last year’s crisis, while food price inflation rose 11.7% from 12, 5% in May.
Core inflation, which excludes volatile food and fuels and provides a clearer picture of long-term price pressures, rose slightly to 5.4% from 5.3% the previous month.
The initial spike in inflation was fueled by Russia’s invasion of Ukraine, which pushed up energy and food prices. The rebound in the global economy from the COVID-19 pandemic has also put a strain on the supply of parts and raw materials.
Energy and wheat prices returned to pre-war levels and supply chain problems eased, but inflation continued to spread to other sectors of the economy.
Companies that sell services instead of goods — a big part of the economy, including everything from office cleaning to haircuts to medical care — have hiked their prices. Hotels and airlines are charging summer travelers more and workers are demanding wage increases to compensate for their loss of purchasing power.
The European Central Bank – along with its peers around the world – has been rapidly raising interest rates, the main medicine against inflation. Increases in the ECB’s benchmark rate make it more expensive for people to borrow to buy homes and cars and businesses to buy new office buildings and factory equipment. This reduces demand and lowers price levels.
A clear impact has been in housing, with prices starting to fall after a year of rallying across Europe as buyers avoid applying for mortgages. Those who have to refinance their home loans also face the prospect of paying thousands of dollars more than before.
While inflation fell rapidly as the first rate hikes took hold, reaching the last mile to 2% may take longer and be more difficult, central bankers say.
ECB President Christine Lagarde warned this week that inflation was proving more persistent than expected. At the bank’s annual policy conference in Sintra, Portugal, she joined US Federal Reserve Chairman Jerome Powell and Bank of England Governor Andrew Bailey in making clear that rates will rise. and will stay there as long as necessary.
The ECB raised rates eight times in a row from minus 0.5% to 3.5%. Lagarde said the bank’s rate-setting board is expected to rise at least once more at its July 27 meeting, while some members have signaled rates could continue to rise even after that.
High rates have raised concerns about their potential impact on growth, not least because the eurozone economy contracted slightly late last year and early this year.
But with an unemployment rate at a record level of 6.5%, the economy still has significant strengths.
The small drop in output in Europe looked more like stagnation, Lagarde said on Thursday, and the ECB’s baseline forecast “doesn’t include a recession, but that’s part of the risk there.”