As food prices outpaced declining fuel prices in Europe in August, annual inflation remained stable, but it was unclear whether the European Central Bank could halt its record-breaking string of interest rate increases.
According to official data released on Thursday by EU statistics agency Eurostat, the consumer price index for the 20 nations that use the euro currency remained stable at 5.3% from the reading in July, supported by food, alcohol, and cigarette prices that rose painfully by 9.8%.
Another important measure of inflation, known as “core inflation,” which excludes volatile fuel and food prices, decreased in August from 5.5% to 5.3%. The ECB will heavily weigh this number when determining whether interest rates should increase or remain the same in order to assess their impact on the economy.
Due to stable global oil prices and a decline in summer heating fuel demand, fuel costs declined by 3.3%.
In contrast to a year-long sequence of meetings when rate rises had been announced in advance, Christine Lagarde, president of the European Central Bank, has stated that the interest rate decision at the policy meeting on September 14 will depend on incoming data. The impact of more expensive loans on households and businesses must be balanced against the ECB’s need to battle inflation with higher rates.
After reaching a peak of 10.6% in October, inflation has decreased, but the rate of drop has slowed recently, and economists believe the “last mile” to bringing inflation back to the bank’s 2% objective may be the most challenging.
The inflation rate has been progressively declining although recent economic indicators have been lackluster. According to market indicators, participants do not believe the ECB will raise interest rates again.
At the beginning of 2023, the eurozone’s economy was in a state of stagnation with no growth. However, it had a slight recovery in the second quarter, expanding by 0.3% over the previous quarter. While purchasing managers’ surveys show activity is decreasing, the economic sentiment indicator from the European Commission, which combines measures of consumer and corporate confidence, registered its lowest value in ten years in August.
Germany, the eurozone’s largest economy, has been a major source of weakness. According to the International Monetary Fund, it will be the only major economy to contract this year, down 0.3%.
Eurozone inflation drops in July as economic growth accelerates
The eurozone’s inflation rate decreased to 5.3% in July from 5.5% the previous month. Since January 2022, before the Russian invasion of Ukraine gave birth to protracted economic uncertainty, the lowest amount of inflation has been recorded.
However, core inflation, which gives a more precise indication of underlying pricing pressures, held steady at 5.5% from June.
Compared to June, annual food, alcohol, and cigarette inflation slowed to 10.8% from 11.6%, while prices for energy and industrial products also decreased. However, inflation in the services sector increased slightly to 5.6% from 5.4% in June.
Alarmingly high inflation rates continue to exist in several nations. Slovakia had the highest inflation last month among the 20 euro-area nations, at 10.2%, followed by Croatia (8.1%) and Lithuania (7.1%).
Although it has decreased overall, inflation is still significantly higher than the European Central Bank’s (ECB) target of 2%, which is in line with past economic forecasts.
In an effort to limit inflation, the ECB raised interest rates last week for the ninth time in a row, reaching their highest levels in 23 years.
Underlying inflation still high
However, the data on core inflation do not provide assurance that the increases in interest rates are having the expected effect.
Interest rates will keep rising, according to ECB president Christine Lagarde, until the underlying pressures on consumer prices start to ease.