Inflation in Europe has seen a significant drop to its lowest level in two years, offering potential relief to consumers facing higher costs for everyday expenses. The annual inflation rate for September stood at 4.3%, down from 5.2% in August and marking the lowest rate since October 2021, as reported by the European Union's statistics agency, Eurostat. However, despite this positive development, the recent surge in oil prices is raising concerns about the prospects of quickly reducing inflation to the European Central Bank's target of 2%.
Core Inflation Falls More Than Expected
Core inflation, which excludes the volatile prices of fuel and food, also experienced a more substantial decline than analysts had anticipated, falling from 5.3% to 4.5%. This figure is closely monitored by the ECB to gauge the overall trend in inflation.
Jack Allen-Reynolds, Deputy Chief Eurozone Economist at Capital Economics, commented on the fall in core inflation, stating, "It reinforces our view that the ECB has finished raising interest rates." He predicted that the overall inflation rate would decrease to 3.5% by the end of the year.
Inflation Comparison with the United States
Comparatively, while inflation in the United States is lower, a measure closely watched by the Federal Reserve showed an acceleration in August to 3.5% year-on-year, up from 3.4% in July, primarily driven by higher gasoline prices.
Energy Prices Decline, Food Inflation Persists
Meanwhile, eurozone energy prices dropped by 4.7% in September, while food price inflation remained uncomfortably high at 8.8%.
Variation in Inflation Across Eurozone Economies
In terms of individual countries within the eurozone, inflation readings varied. Germany's annual inflation rate decreased to 4.3% in September from 6.4% the previous month, while Spain's inflation rate increased to 3.2% from 2.4%. Economists cautioned that the significant drop in Germany's inflation was somewhat exaggerated due to a statistical anomaly related to the end of a subsidized transportation ticket and a fuel subsidy in September 2022, which had inflated consumer prices during that month.
ECB's Response to Inflation
The recent inflation figures follow a series of rapid interest rate increases by the ECB, with its benchmark deposit rate reaching a record high of 4% this month, up from minus 0.5% in July 2022. ECB President Christine Lagarde mentioned that maintaining interest rate levels for an extended period could significantly contribute to achieving the bank's inflation target of 2%, a goal not expected to be reached until 2025.
Impact of High Inflation
High inflation has been impacting the European economy as rising prices erode the purchasing power of consumers, leading to cutbacks in spending on other goods and services. Economic growth has stalled, with indicators suggesting a potential downturn in the current quarter.
This bout of inflation was triggered by the global economic recovery from the COVID-19 pandemic, resulting in supply chain disruptions and shortages of raw materials. The situation worsened with Russia's invasion of Ukraine, causing energy prices to surge due to Moscow's reduction of natural gas supplies to Europe.
While supply chain issues and energy prices have moderated, inflation continues to affect various sectors of the economy, with higher prices for services such as haircuts and hotel stays. Workers have been seeking higher wages to offset the decline in their purchasing power.
The Balancing Act for the ECB
The ECB's strategy to combat inflation has involved raising interest rates to discourage borrowing for major expenses, such as housing or business expansion. However, higher interest rates can also weigh on economic growth, presenting a delicate balancing act for the central bank.
Many economists believe that the ECB has likely completed its rate hikes unless unforeseen circumstances arise to prevent further declines in inflation. One potential factor that could influence this outlook is a sustained increase in oil prices, which have risen recently following production cuts by major oil producers Saudi Arabia and Russia.
Source: by DAVID MCHUGH at APnews