In March, the Eurozone’s consumer price index fell to 6.9 percent from February’s pace of 8.5 percent. It was the lowest reading in more than a year and beat The Wall Street Journal’s estimate of 7.1 percent.
However, core inflation, which excludes energy and food costs, set a record, edging up to 5.7 percent compared to 5.6 percent in the previous month.
The core rate’s stubbornness increases the likelihood that the European Central Bank (ECB) will again increase its interest rate.
The ECB’s key rate has moved from -0.50 percent a year ago to between 3 and 3.50 percent now, straining the region’s financial industry as well as the economies of deeply indebted countries in southern Europe.
The startling inflation news “reinforces our view that the ECB will keep hiking despite some financial stability concerns,” HSBC analysts wrote in a note.
Governments also could tax what are seen as business’s “windfall profits” as a way to slow price growth, The Wall Street Journal noted.
As interest rates rise, lending is likely to decline and could do so more than the ECB expects, jeopardizing banks’ stability and pushing the economy closer toward recession, the WSJ pointed out.
The ECB has warned of the growing chances of a wage-price spiral, a chicken-and-egg dilemma in which each chases the other higher.
Those fears were worsened recently when the British government raised pay for striking nurses and Germany’s transport workers staged a massive, pay-related strike late last month that paralyzed the country.
ECB president Christine Lagarde has called for businesses, not just workers, to accept lower incomes as a way to share inflation’s pain and not fuel inflation with higher prices.
Wages in the Eurozone rose at a 5.1-percent annual clip in last year’s final quarter, the second-fastest pace since 1996, but still far less than inflation’s rate.
TREND FORECAST: Consumer prices fell as sky-high energy prices descended; the core inflation rate, which excludes energy prices, rose because those lower energy prices have yet to work their way through the economy.
The Eurozone’s consumer price index should show declines as newly reduced energy costs pervade other cost centers.
The Ukraine war and Western sanctions remain wild cards. If the war intensifies or sanctions ratchet up, inflation could gain new ground. And as we note in “OPEC+ SLASHES DAILY OIL OUTPUT LIMIT BY 1.16 MILLION BARRELS” in this issue of The Trends Journal, the future is for high oil prices.