In July, inflation across the 20 countries sharing the euro currency edged down to 5.3 percent from 5.5 percent in June, reaching its slowest pace since January 2022, and the area’s GDP expanded by 0.3 percent in the second quarter.
However, core inflation, which ignores volatile food and energy costs to give a more reliable view of underlying inflation, remained stuck at June’s 5.5 percent
The annual rate of price increases for alcohol, food, and tobacco fell from 11.6 percent in June to 10.8 percent in July. Costs of energy and industrial equipment also fell.
Service prices moved up 5.4 percent in June to 5.6 percent last month, reflecting consumers’ shift to services and away from goods post-COVID.
The price slowdown is not shared evenly. Last month, Slovakia saw prices jump 10.2 percent, year on year. Costs in Croatia grew by 8.1 percent and by 7.1 percent in Lithuania.
The second quarter’s growth beat analysts’ estimates and was twice as strong as the same period a year earlier, according to Eurostat, the European Union’s statistics agency.
Ireland performed best, turning in a 3.3-percent gain. Lithuania’s economy grew 2.1 percent.
However, not all countries finished in the black. Sweden’s economy shrank by 1.5 percent, Latvia’s by 0.6 percent, Austria’s was down -0.4 percent, and Italy – the zone’s third-largest economy – puckered by -0.3 percent.
Germany, the Eurozone’s largest economy and manufacturing powerhouse, flatlined.
On 27 July, the European Central Bank (ECB) increased its base interest rate for the ninth time in 12 months as it attempts to wrestle inflation back to its 2-percent target.
However, “the data for core inflation does not give confidence that the interest rate hikes are having their desired impact,” Euronews commented.
The ECB will continue to raise its rate until core inflation shows clear and consistent signs of slowing, ECB president Christine Lagarde has repeatedly stated.
TREND FORECAST: Because core inflation refuses to move, the guess on The Street is the ECB is expected to raise its interest rate next month and probably at least once more after that.
The region sank into a technical recession in this year’s first three months. By the time the central bank’s rate hikes have permeated the entire Eurozone economy, the region will have entered a recession.
Christine Lagarde and other ECB officials have said they would be willing to accept a recession if that becomes necessary to reverse inflation. Chances are excellent that they will get their wish.
For more details, see our ECONOMIC UPDATE in this week’s Trends Journal.