Eurozone inflation is falling, but pressure on prices remains

As winter draws to a close, inflation levels in Europe eased last month, the European Commission said mentioned on Thursday, even as concerns grew that stubbornly high rates could pressure central bankers to continue raising interest rates.

Consumer prices in the 20 countries that use the euro as their currency rose at an annual rate of 8.5% percent in February, down slightly from January’s rate of 8.6 percent. Rates have fallen year-on-year since peaking at 10.6 percent in October.

But some of the largest economies showed worrying increases, and core inflation — a measure that excludes more volatile categories such as food and energy — rose to a record 5.6 percent in February from 5.3 percent.

In France, inflation reached 7.2 percent in February, its highest level in more than two decades, while in Spain inflation grew at an annual rate of 6.1 percent. Germany, Europe’s largest economy, reported that the annual rate rose to 9.3%.

The bleak economic outlook for Europe forecast last fall has brightened dramatically. It turned out that fears of a deep recession were exaggerated. Dizzying energy prices have fallen thanks in part to warm winters and conservation efforts. The road is still bumpy.

Food prices are still high. The war between Russia and Ukraine, two prominent sources of energy and agriculture, has caused a downsizing global food supply Fertilizer production is disrupted. Uncertainty over whether Russia will continue to abide by a deal to ease its blockade of Ukrainian ports is adding to concern about food supplies.

Devastating droughts in Europe, China, the Horn of Africa and the United States due to climate change have also contributed to lower harvests and higher food prices.

Even Belgium, where inflation fell to an annual rate of 5.5 percent last month, among the lowest in the eurozone, Saw food prices soar.

In addition to food, inflation was driven by higher prices for alcohol, tobacco, and services.

The Baltics continued to top the charts with annual inflation rates above 17%. Slovakia came in second with 15.5 percent.

Some of the inflationary pressures can be attributed to governments’ retreat from policies such as price controls and subsidies that lessened the impact of higher energy prices on households. In France, electricity prices for some consumers were allowed to rise in February after they were frozen.

A rebound in Chinese production could also push prices higher. China’s massive manufacturing capacity, combined with its key role in the global supply chain, gives it significant influence over the global economy, for example, by increasing energy demand.

However, analysts are divided on whether the increase in manufacturing will ease price pressures by expanding supply, or increase consumer spending by making long-awaited goods finally available.

Some economists and policymakers watch core inflation especially closely because it indicates whether inflation is taking hold throughout the broader economy.

“The key here is what happened to the base rate,” said Melanie Debono, chief economist for Europe at Pantheon Macroeconomics. She added that it is quite clear that ECB policy makers who believe interest rates should be higher “will call for an extension of the series of interest rate hikes”.

Companies continued to raise prices sharply in some sectors. “Companies have been increasing prices much more quickly than they are,” Ms. Debono said, indicating that they are looking to protect their profit margins.

Pressure from workers to increase wages could lead to an increase in inflation this year.

Although well below the peak in October, inflation is still well above the central bank’s 2% target. Christine Lagarde, President of the Bank, said: Half point rate increase This month is not confirmed. She added in media interviews earlier this week that the bank would continue to raise interest rates if necessary to meet inflation targets.

Eswar Prasad, a professor of trade policy at Cornell University, said the hike in interest rates has put unwelcome fiscal pressure on governments already struggling with huge public debts.

He added that “recent inflation data and potential policy responses have hampered growth prospects in the euro area for 2023, which had brightened somewhat earlier in the year.”