Lowest European Inflation Since Russia-Ukraine Invasion

Inflation

The rate at which prices are increasing in Europe is at its lowest point since the Russian invasion of Ukraine. Due to this, many people believe that the central bank in the region should stop raising interest rates soon.

Inflation - Figure 1
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The cost of goods and services for people in the 20 countries that use the euro went up by 6.1% last month. This is lower than the increase of 7% from last April. This information comes from a preliminary report by the European Union's statistics agency.

Inflation rate is very low. It's the lowest since February 2022. That's when Moscow invaded its neighbor. The invasion made energy prices go up.

In May, food price increase slowed down again. Energy prices even went down. Core inflation, which doesn't include food and energy, also slowed down to a four-month low of 5.3%.

New figures released on Wednesday revealed that inflation rates in Germany, France, Italy and Spain have dropped significantly. The cost of goods and services across all major sectors has decreased, demonstrating a wider trend across Europe.

Interest rate hikes may stop in Europe. Christine Lagarde, head of the European Central Bank, said more action on interest rates is needed. She thinks they must get to a level that slows down the economy more.

Lagarde said inflation's very high now and will stay that way for a while. She said this at a bank conference in Germany.

The ECB focuses on keeping inflation at 2%. The Bank of England and the US Federal Reserve share this goal.

May's inflation data may influence policymakers to end ECB's tightening cycle, according to Franziska Palmas from Capital Economics. However, the tightness of the labour market and services inflation could lead hawkish policymakers to argue otherwise.

The unemployment rate in the Euro area went down to 6.5% in April. It was at 6.6% in March. EU data released on Thursday shows this.

If core inflation keeps decreasing, the ECB may only do two more interest rate increases. This would bring the deposit rate to a high of 3.75%, Palmas said.

New data released on Tuesday revealed that lending by banks in the eurozone didn't see any growth in April. Loans to households remained stagnant during that same period.

Bert Colijn, a senior eurozone economist at ING, said that this proves the ECB's tightening policy is effective. It could also give more support to those who disagree with raising interest rates this summer.

The ECB upped interest rates by 375 basis points in under 12 months. Before, rates were minus 0.5% in July 2022. Now, they are at 3.25%.

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