Eurozone inflation has ticked up sharply, putting hopes of a cut in interest rates in jeopardy, with Christine Lagarde, President of the European Central Bank warning prices could continue to increase for months.
The 2.9 percent figure released today was up from the 2.4 percent annual inflation recorded in November – albeit well down from the peak of 10.6 percent in October 2022. It follows seven straight monthly declines.
Ms Lagarde warned it was likely to continue in the early part of 2024. The central bank for the 20 European Union countries which use the euro currency has raised its benchmark interest rate to a record-high four percent and has vowed to keep it there as long as necessary to push inflation down to its goal of two percent considered best for the economy.
The faster-than-expected fall in inflation over the last months of 2023 had led some analysts to predict the central bank would start cutting interest rates as early as March – but the December rebound in inflation supports analysts who are predicting that rates will not start to come down until June.
Carsten Brzeski, chief eurozone economist at ING bank, said a jump in inflation to 3.8 percent from 2.3 percent in Germany, Europe’s largest economy, “strengthens the stance of keeping a very steady hand and not rushing into any rate cut decisions”.
Officials at the US Federal Reserve also stressed the importance of keep rates high until inflation is “clearly moving down,” according to minutes of their December 12-13 meeting released on Wednesday. The Fed has signalled three rate cuts this year.
US consumer prices were up 3.1 percent in November from a year earlier.
Higher interest rates are the typical central bank tool against inflation. They raise the cost of borrowing for consumer purchases, particularly of houses and apartments, and for business investment in new offices and factories.
That lowers demand for goods and relieves pressure on prices – but it also can limit growth at a time when it’s in short supply in Europe. The economy shrank 0.1 percent in the July-to-September quarter.
Inflation itself, however, has been a massive challenge to economic growth because it deprives consumers of purchasing power.
The ECB – like other central banks around the world – said raising rates quickly was the best way to get it under control and avoid even more drastic measures later.
The December inflation figure was boosted by the end of energy subsidies in Germany and France that had lowered prices a year ago.
Core inflation, which excludes volatile fuel and food prices, eased to 3.4 percent from 3.6 percent in November, according to European Union statistics agency Eurostat.
The figure is closely watched by the ECB.
Inflation spiked in Europe as the rebound from the COVID-19 pandemic strained supplies of parts and raw materials, then as Russia invaded Ukraine in February 2022, raising costs for food and energy.
Europe has since found other supplies of natural gas outside Russia to generate electricity, power factories and heat homes, so energy prices have eased.
Europe – and the rest of the world – is facing a possibility of new delays and higher prices for consumer products as attacks by Yemen’s Houthi rebels have scared away the world’s largest container shipping companies and energy giant BP from sailing through the Red Sea and Suez Canal.
