Inflation across most economies in Europe easedlast month but concerns about continuing price increases in sectors like services and food are likely to prompt the European Central Bank to raise interest rates yet again despite slowing growth and the risk of higher unemployment.
Consumer prices in the 20 countries that use the euro as their currency rose at an annual rate of 5.5 percent in June, downfrom 6.1 percent in May, the statistical office of the European Commission reported on Friday.
The increase in what is known as core inflation, which strips out the volatile categories of food and energy and is a more reliable measure of underlying price pressures, will be of particular concern to central bankers. That rate was 5.4 percent in the year through June, up from 5.3 percent in May.
Why It Matters
Europe’s economy, though more resilient than many forecasters had predicted, has still significantly weakened over the past 12 months, with a drop in inflation-adjusted wages and consumer confidence. Growth is expected to pick up, but further increases in interest rates could act as a brake on the economy.
Gita Gopinath, first deputy managing director of the International Monetary Fund, said this week that an “uncomfortable truth” is that central banks must remain diligent about bringing down inflation rates “even if that means risking weaker growth.”
The same message is coming from the E.C.B., which has already signaled the likelihood of rate increases in July and September. Speaking this week at the central bank’s 10th annual conference in Sintra, Portugal, Christine Lagarde, the E.C.B.’s president, said: “Inflation in the euro area is too high and is set to remain so for too long.”
The rapid rate increases have drawn criticism from political leaders like Giorgia Meloni, Italy’s prime minister, who scorned “the E.C.B.’s simplistic recipe of raising interest rates” in a speech to Parliament on Wednesday.
Lucrezia Reichlin, a professor at the London Business School and a former director general of research at the E.C.B., said “it would be a mistake” to raise rates in September. “There is a misconception that core inflation is driven by demand,” she said, but the tiny increase in Juneis a result of a time lag between the impact of previous rate increases and significant declines in energy prices.
Riccardo Marcelli Fabiani, an economist at Oxford Economics, said the slight increase in core inflation “does not mean that the deflationary process has stopped.” Inflation in the services sector declined in France and Italy, he noted, which were among the “increasing signs that deflationary pressures are broadening.”
Inflation in the eurozone — whipped up by soaring energy and food prices last year after the coronavirus pandemic eased and Russia invaded Ukraine — peaked in October at 10.6 percent.
Price rises have been slowing across the eurozone since then. France’s annual inflation rate fell to 5.3 percent in June, from 6 percent in May. Italy’s rate fell to a 14-month low of 6.7 percent, down from 8 percent the previous month. Spain’s rate fell to
The New York Times