Unpacking Eurozone Inflation Rates
Eurozone inflation rates have dropped to their lowest level since 2022 due to the continued impact of COVID-19. Annual consumer prices for the bloc dropped from 7% in April to 6.1% in May, lower than the 6.3% predicted by economists in a Reuters poll. The fall has been largely attributed to the launch of Germany’s subsidized public transport ticket, priced at €49 per month, which has dampened growth in transport service prices. According to the official report of the European Central Bank’s last political meeting, some board members claim that lower interest rate hikes could be useful for them to keep raising interest rates for a longer period if inflationary pressures persist. ECB President Christine Lagarde has suggested the need for more interest rate hikes to address current and potential future inflation risks, adding that the “underlying inflation has not peaked.”
The ECB’s Efforts to Stem Inflation
ECB’s deposit rates have been increased from minus 0.5% last July to 3.25% in May in an unprecedented move to counter inflation. The impending interest rate hikes are expected to fall in increments of a quarter of a percentage point in upcoming weeks. Some investors speculate that inflation would need to drop quicker before any stoppage of further hikes. Rate regulators are highly focused on inflation, which impacts energy and food prices by raising costs. Despite the easing of pricing pressures across all areas of products for the first time since rising over 18 months ago, policymakers are still likely to raise rates on June 15.
The Concern About Wage Growth as a Driver of Inflation
Rising wage growth is driving inflation as it becomes a bigger factor. Due to the pandemic, Eurozone workers have seen a 4% decrease in real wages since 2020, resulting from the economy’s structural adjustments. Eurostat data released on Thursday also reveals a record-low Eurozone unemployment rate of 6.5% for April. ECB president Christine Lagarde warned that, despite the challenges currently faced by Eurozone lending, consumer surveys signal no changes to vacation plans, implying the likelihood of considerable bargaining power being utilized by employees. This outcome could lead to wage-profit-price spirals and wage-led inflation.
Lower Energy Prices’ Role in Restricting Companies’ Ability to End Price Pressures
Eurozone energy prices declined by 1.7% in May compared to the same period the previous year. Services inflation reduced from 5.2% to 5%, while goods inflation lessened from 6.2% to 5.8%. Fresh food inflation subsided from 10% to 9.6%, and processed foods, alcohol, and tobacco prices decreased from 14.6% in April to 13.4% in May. Lagarde has stated that lower energy prices should limit firms’ ability to increase margins further and that it is the ECB’s responsibility to restrict demand enough to avoid a self-perpetuating spiral in wages, profits, and prices.
A Brighter Horizon in the United States and Great Britain
Despite the Eurozone’s challenges in keeping up with inflation, consumer price inflation in the United States dropped to 4.9% in April. In contrast, Great Britain recorded an April inflation rate of 8.7%; however, the inflationary pressures domestically are easing. Consumer price inflation rates have fallen in 18 of the 20 Eurozone member countries, with the Netherlands recording rising prices.
Summary
Eurozone inflation rates have dropped to their lowest levels since February 2022, reaching 6.1% in May as opposed to the 7% recorded in April. With the main focus on inflation rates as central to economic concerns in the region, the ECB has raised deposit rates from minus 0.5% last July to 3.25% in May at an unprecedented speed. The upcoming quarter of a percentage point interest rate hike is expected shortly before an additional hike in July. Despite pricing pressures relenting across all product areas for the first time since rising over 18 months ago, interest rates may well continue to rise on June 15. Rising wage growth has become a central concern among the rate regulators and is seen as a factor driving inflation. Although the Eurozone is still experiencing a list of challenges in keeping up with inflation, the United States and Great Britain have experienced declines in consumer price inflation.
Exploring Future Inflation Risks
Inflation remains one of the significant risks to the prolonged economic recovery of the Eurozone states. While efforts continue at bringing consumer prices under control, a new wave of challenges is set to arise from the ongoing supply-chain constraints. Coupled with rising global demand as economies recover, the manufacturing industry is faced with supply-chain disruptions fuelled by material shortages and shipping delays worldwide. Therefore, policymakers must take on a proactive approach by enacting broader economic policy measures that address inflationary pressures across the region. One of the potential actions include facilitating a more holistic approach to bringing production plants back on track, with additional monitoring efforts in controlling prices for consumers and businesses alike. It remains the responsibility of rate regulators to balance economic objectives while remaining steadfast in bringing inflation rates under control.
Keywords: Eurozone, inflation rates, interest rate hikes, ECB, deposit rates, wage growth, consumer price inflation, material shortages, supply-chain constraints.
Sources:
1. https://www.ecb.europa.eu/press/key/date/2023/html/ecb.sp230601~2740cf2320.en.html?utm_source=media_newsletter&utm_medium=email&utm_campaign=20230601_The_fight_against&utm_content=The_fight_against
2. https://www.ft.com/eurozone-inflation
3. https://www.ft.com/content/bd3c28cc-3407-45a9-9c72-9c89c9aa9740
4. https://www.ft.com/content/38c56ada-dba3-425b-9d5e-5494d12a3877
5. https://www.ft.com/content/7b7e6a9b-a428-49ce-8560-c2fce5d0f73f
6. https://ec.europa.eu/eurostat/documents/2995521/16863926/2-01062023-AP-EN.pdf/0a8cc157-6329-b576-3723-864fd1e85f54
7. https://www.ecb.europa.eu/press/accounts/2023/html/ecb.mg230601~9d35f80dee.en.html
8. https://www.ft.com/eu-energy
9. https://www.ft.com/content/70139ba2-fba6-4bf9-8913-7a12fc67de9d
10. https://www.ft.com/content/32b054c1-0802-4f03-82d6-b3ccda33d2bb
—————————————————-
| Article | Link |
|---|---|
| UK Artful Impressions | Premiere Etsy Store |
| Sponsored Content | View |
| 90’s Rock Band Review | View |
| Ted Lasso’s MacBook Guide | View |
| Nature’s Secret to More Energy | View |
| Ancient Recipe for Weight Loss | View |
| MacBook Air i3 vs i5 | View |
| You Need a VPN in 2023 – Liberty Shield | View |
Eurozone inflation has fallen more than economists expected it to hit its lowest level since Russia invaded Ukraine more than a year ago, but the leader from the European Central Bank signaled that more interest rate hikes were needed to rein in lingering price pressures.
Annual consumer prices in the single currency bloc of 20 countries rose 6.1% in the year to May, down from 7% in April, according to published data by the EU statistical agency Eurostat on Thursday. It is the lowest level since February 2022 and was lower than the 6.3% forecast by economists in a Reuters poll.
ECB President Christine Lagarde said in a speech shortly after the data was released, inflation was still “too high” and further interest rate hikes were needed to bring it back to its 2% target.
Eurozone rate regulators are particularly focused on inflation, which suppresses energy and food prices. That measure fell from 5.6% in April to 5.3% in May, which was more than expected but seemed unlikely to convince policymakers to stop raising rates when they next meet on June 15.
Eurozone sovereign bond markets fell and the euro rose against the dollar as investors bet inflation was not falling fast enough for the ECB to stop raising rates. The yield on two-year, rate-sensitive German bonds rose 4.8 basis points to 2.76%, while the euro gained 0.25% to $1.072.
Economists said the drop in core inflation was largely due to the impact of Germany’s launch of a subsidized public transport ticket at €49 a month in May, which dampened growth transport service prices.
“Although further gradual cuts in the policy rate seem likely, we don’t think that will stop the ECB from raising interest rates in June and probably July,” said Jack Allen-Reynolds, an economist at research group Capital. Economics.
Annual inflation fell in 18 of the 20 eurozone member countries, rising only in the Netherlands. Pricing pressures have also eased across all product areas for the first time since starting to rise at the fastest pace in a generation more than 18 months ago.
But Lagarde warned that “there is no clear evidence that underlying inflation has peaked.” As eurozone lending stalls, Lagarde told a German banking event in Hanover that ECB consumer surveys “show that tighter monetary policy will not affect plans for people’s vacation.
The ECB has already raised its deposit rate at an unprecedented pace, from minus 0.5% last July to 3.25% in May. Investors are betting he will hike rates another quarter of a percentage point at his next meeting in two weeks and once more in July before pausing.
According to official report of his last political meeting released Thursday.
Some board members said lower rate hikes would allow them to “continue raising rates for longer, should underlying inflationary pressures persist or even strengthen through the summer.” It has even been “argued that signs of a wage-profit-price spiral are emerging” by some rate setters.
Pricing pressures remained higher in the euro area than in the United States, where consumer price inflation fell to 4.9% in April. Eurozone and US prices cooled faster than Great Britainwhere inflation reached 8.7% in April.
Rising wage growth “is becoming a bigger driver of inflation,” Lagarde warned. While eurozone workers have suffered a 4 percentage point drop in real wages since the pandemic hit in 2020, she said tight labor markets meant they “have considerable bargaining power , which they begin to use to recover these losses”.
Unemployment in the euro zone fell to a new high of 6.5% in April, according to separate Eurostat data released on Thursday.
Eurozone energy prices fell 1.7% from a year ago in May, after rising 2.4% the previous month. Services inflation fell from 5.2% to 5%, while goods inflation fell from 6.2% to 5.8%.
Lagarde said lower energy prices should “limit companies’ ability to further increase their profit margins, which has been a key factor behind recent price pressures.” It was the ECB’s responsibility to “restrict demand sufficiently” to prevent a self-perpetuating spiral in wages, profits and prices, she said.
Food prices dipped slightly in May, but continued to rise at a rapid pace. Fresh food inflation rose from 10% to 9.6%, while the price of processed foods, alcohol and tobacco rose 13.4% from 14.6% the previous month.
https://www.ft.com/content/3f9d97c5-b353-4f27-8c65-8bb2c7db1aed
—————————————————-