Inflation in Europe rose to 2.6% year-on-year in May, in line with official figures on Friday, greater than expected as a painful rise in consumer prices takes time to fade.
But that may European Central Bank of a primary rate of interest cut next week – and before the US Federal Reserve to scale back credit costs for businesses and consumers.
According to the EU statistics agency Eurostat, the official figure for the 20 euro countries in April was only 2.4 percent. The markets had expected 2.5 percent for May.
This would put the ECB one step ahead of the US Federal Reserve, which is refraining from cutting rates of interest due to persistent inflation within the US. This could be a departure from the rate-hiking cycle during which the ECB lagged behind the Fed when inflation erupted on the earth’s advanced economies. US consumer inflation stood at a seasonally adjusted annual rate of three.4% in April.
In this case, the ECB faces a distinct economic situation, having been hit harder by an increase in energy prices that has now subsided. Inflation within the US was fuelled by higher stimulus spending during and after the coronavirus pandemic and by more robust growth, putting the Fed in a distinct position.
Inflation rose to double digits in Europe after Russia increased its inflation rate through the comprehensive invasion of Ukraineand the recovery from the pandemic clogged supply chains for parts and raw materials. Inflation has fallen as energy prices have fallen and provide bottlenecks have eased.
The decline in inflation has slowed in recent months as employees have pushed for higher wage deals to make up for his or her lost purchasing power. This has led to stubbornly rising prices within the services sector, a broad category that features every thing from hotel rooms to medical care to concert tickets and where wages make up a big portion of the fee of doing business. Services prices rose 4.1 percent in May, while energy prices rose just 0.3 percent and food inflation was no higher than the general figure at 2.6 percent.
As inflation approaches the ECB’s goal of two percent, concerns about economic growth have grown. In the eurozone, gross domestic product has not grown significantly for 4 years. While higher rates of interest combat inflation by making loans and purchases costlier, they may also weigh on growth.
ECB officials have made it clear that a cut in the important thing rate of interest from the present record high of 4% is on the table when the central bank’s Governing Council meets in Frankfurt. Christine Lagarde said last week she was “really confident” that inflation was under control.
Philip Lane, a member of the six-member board that runs the bank at its Frankfurt headquarters, was quoted by the Financial Times as saying officials were “ready to lift the top limits” on borrowing costs. Lane is the official who prepares monetary policy decisions for the 26-member Governing Council, which sets key rates of interest and includes the heads of the eurozone countries’ national central banks.
How quickly the bank will cut rates of interest at the following meetings stays to be seen. The recently improved growth indicators for Europe in addition to sluggish inflation and better wage growth “could argue against a rate cut next week,” said Carsten Brzeski, global head of macroeconomics at ING Bank.
“However, the ECB’s communication over the past two months has made a cut almost impossible,” Brzeski said. This signifies that after the June meeting, the bank may cut rates “very gradually” but will proceed to maintain them at levels that constrain credit, growth and inflation.
