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Why It Matters: The goal is to control inflation while preventing recession.
The International Monetary Fund recently said that reducing 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 overall inflation fall from a peak of 10.6 percent last October. The euro zone has avoided recession, but economic growth remains low.
Data on loans released on Tuesday by the central bank show that consumer credit demand is weakening, as banks make it more difficult for borrowers to receive credit and high interest rates on loans cause demand to fall, cooling the economy.
But policymakers caution that they are looking for any indication that prices will fall in the long term.
“We need to see a sustained decline in core inflation that gives us confidence that our policies are starting to work,” Isabel Schnabel, a member of the central bank’s executive board, said. said in an interview with Politico last week.
Country by Country: Rates remain high in the Baltics, but fall in Germany.
The Baltic countries and Slovakia saw a double price increase, up to 15 percent for Latvia. Some of Europe’s larger economies with lower rates are under pressure from workers seeking wage increases to keep pace with the cost of living.
The deviation rate also reflects domestic measures taken by the government to control energy prices. As the summer vacation season picks up, countries with strong tourism markets are also poised to see the impact 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 high, while government intervention to reduce energy costs began to take place.
Workers in Germany’s public sector reached a deal to give 2.5 million employees a 5.5 percent pay rise next year. The deal will set a precedent for other wage talks and could threaten the European Central Bank’s forecast that euro zone wage growth will pick up this year.
In France, which has been hit for months by a wave of attacks on the government’s decision to raise the retirement age, inflation rose to 6.9 percent in April, from 6.7 percent in March, driven mainly by energy, with the price of services also increases. small.
In Spain, prices rose by 3.8 percent in April, from 3.1 percent the previous month as food costs rose, although energy prices that rose to record levels last year continued to fall.
What’s Next: Decisions by the European Central Bank.
Inflation data will influence the European Central Bank’s decision on whether to continue raising interest rates in an effort to reduce inflation. The bank’s Governing Council meets on Thursday, and most analysts expect it will vote to raise rates by a quarter or half a percent.
The bank raised its deposit rate to 3 percent last month, the highest since October 2008, as it seeks to curb demand and inflation closer to its 2 percent target.
“Although headline inflation has fallen and will fall again, this is not yet a time for relief,” said Carsten Brzeski, chief economist at ING Germany. “The ECB does not want to repeat the previous mistakes of underestimating inflation and therefore will go too far, even if this is ultimately a policy mistake.”
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