Why It Matters: The goal is to control inflation while avoiding a recession.
The International Monetary Fund recently said that curbing inflation while avoiding a recession is Europe’s biggest challenge in the coming months as the continent continues to digest the impact of the war in Ukraine on its economy.
So far, the European Central Bank’s campaign to raise interest rates has helped bring headline inflation down from a peak of 10.6 percent last October. The euro zone has avoided a recession but economic growth remains modest.
Lending data released by the central bank on Tuesday showed demand for consumer credit slowing as banks made it harder for borrowers to obtain credit and high borrowing rates caused demand to fall, further cooling the economy.
However, policymakers warn that they are looking for signs that prices will fall over the long term.
“We need to see a sustained decline in core inflation that gives us confidence that our policies are starting to work,” said Isabel Schnabel, a member of the central bank’s Executive Board. said in an interview with Politico last week.
Country by country: Rates remained high in the Baltics but fell in Germany.
The Baltic countries and Slovakia recorded double-digit price increases, in Latvia up to 15 percent. Some of Europe’s larger economies with lower interest rates are facing pressure from workers seeking wage increases to keep up with the rising cost of living.
The different rates also reflect domestic measures that governments have introduced to contain energy prices. With the start of the summer vacation season, even countries with strong tourism markets will feel the effects of rising service prices.
In Germany, Europe’s largest economy, the annual inflation rate fell to 7.6 percent from 7.8 percent in March. Food prices remained stubbornly high while government intervention to contain energy costs began to take hold.
Public sector workers in Germany agreed to give 2.5 million workers a 5.5 percent pay rise next year. This deal is likely to set a precedent for other wage negotiations and could threaten the European Central Bank’s forecast that euro-zone wage growth will peak this year.
In France, which has been plagued for months by waves of strikes over the government’s decision to raise the retirement age, inflation rose to 6.9 percent in April from 6.7 percent in March, mainly driven by energy, and service prices also rose a little.
In Spain, prices rose to 3.8 percent in April from 3.1 percent in the previous month as food costs rose, although energy prices, which rose to record levels last year, fell further.
What’s Next: A decision by the European Central Bank.
The inflation data will influence the European Central Bank’s decision on whether to raise interest rates further in order to bring down inflation. The bank’s Governing Council meets on Thursday and most analysts estimate it will vote in favor of either a quarter or half percent rate hike.
The bank raised its deposit rate to 3 percent last month, the highest since October 2008, as it sought to dampen demand and push inflation closer to its 2 percent target.
“Even if headline inflation has fallen and will continue to fall, this is not the moment of relief yet,” said Carsten Brzeski, chief economist at ING Germany. “The ECB does not want to repeat the earlier mistake of underestimating inflation and will therefore be willing to go too far, even if this turns out to be a policy mistake in the end.”