Europe inflation slips to 5.5 per cent — but that won’t stop central bank rate hikes

FRANKFURT, Germany –

Inflation in Europe slid again in June but fell too slowly to offer much relief to shoppers grumbling over price tags or to stop more interest rate hikes that will raise the cost of borrowing across the economy.

The annual rate of 5.5 per cent was down from 6.1 per cent in May in the 20 countries that use the euro currency, the European Union statistics agency Eurostat said Friday.

While that is a big drop from the peak of 10.6 per cent in October, persistently high prices in the U.S., Europe and the United Kingdom pushed some of the world’s top central bankers to make clear they are going to keep raising rates and leave them there until inflation drops to their two per cent goal considered best for the economy.

Consumers in Europe saw relief on energy costs, which dropped 5.6 per cent after last year’s crisis, while food prices rose 11.7 per cent from a year earlier, easing from 12.5 per cent in May.

Core inflation, which excludes volatile food and fuel costs and offers a clearer picture of longer-term price pressures, rose slightly to 5.4 per cent from 5.3 per cent the month before.

Inflation varied widely across the eurozone — Slovakia had the highest at 11.3 per cent. Germany, Europe’s largest economy, recorded 6.8 per cent, and France saw 5.3 per cent. Three countries came in under the ECB’s two per cent goal: Luxembourg at one per cent, Belgium at 1.6 per cent and Spain at 1.6 per cent.

The initial outbreak of inflation was fuelled by Russia’s invasion of Ukraine, which sent energy and food prices higher. The global economy’s rebound from the COVID-19 pandemic also strained supplies of parts and raw materials.

Energy and wheat prices have subsided to pre-war levels and supply chain problems have eased, but inflation has kept snaking through other parts of the economy.

Companies providing services instead of goods — a huge swath of the economy including everything from office cleaning to haircuts and medical care — have raised their prices. Hotels and airlines are charging summer travelers more, and workers are pressing for pay raises to make up for their lost purchasing power.

The European Central Bank — along with its peers around the world — has been rapidly raising interest rates, the chief medicine against inflation. Increases in the ECB’s benchmark rate make it more expensive for people to borrow to buy homes and cars and for businesses to acquire new office buildings and factory equipment. That reduces demand, working to drop price levels.

One obvious impact has been in housing, with prices starting to fall after a yearslong rally across Europe as homebuyers avoid asking for mortgages. Those who have to refinance their home loans also are facing the prospect of paying thousands more than they used to.

While inflation fell rapidly as the first rate hikes took hold, going the last mile to two per cent may take longer and be more difficult, central bankers say.

ECB President Christine Lagarde warned this week that inflation is turning out to be more persistent than hoped. At the bank’s annual policy conference in Sintra, Portugal, she joined U.S. Federal Reserve Chair Jerome Powell and Bank of England Gov. Andrew Bailey in making clear that rates will go higher and stay there for as long as necessary.

The strength of core inflation in Friday’s figures means the “ECB will keep hiking,” said Jack Allen-Reynolds, deputy chief eurozone economist at Capital Economics.

Lagarde has all but promised an increase at the ECB’s July 27 meeting, and Allen-Reynolds said there was “a good chance of another hike at the following meeting in September, too.”

The ECB has raised rates eight times in row, from minus 0.5 per cent to 3.5 per cent. High rates have raised concerns about their potential impact on growth, especially because the eurozone economy contracted slightly at the end of last year and the beginning of this year.

But with unemployment at a record low of 6.5 per cent, the economy still has significant strengths.

The small dip in output in Europe was more like stagnation, Lagarde said Thursday, and the ECB’s baseline forecast “does not include a recession, but it’s part of the risk out there.”