Core Inflation Soars to Record High in Eurozone

Core inflation hit a record high in the eurozone in January amid the eurozone energy crisis.

The eurozone is currently facing its worst energy crisis in decades after the war between Russia and Ukraine sent gas and oil prices soaring.

Last month, the European consumer price index showed euroblock inflation reaching a record high of 8.6%, but on February 23, revised data from the European Union’s statistical agency Eurostat showed that , down from 9.2% in December.

The January report also confirmed that the bloc of 20 member states saw inflation fall for the third month in a row.

Latvia had the highest inflation rate in the currency area, surpassing 21%. Luxembourg and Spain, on the other hand, were the lowest at just under 6%.

Inflation continues to rise in Europe despite recent slowdown

Meanwhile, Eurozone core inflation, which does not take into account food and energy prices, rose to 5.3% in January from 5.2% in December, Eurostat said.

The revised headline inflation rate also surged last month after German data turned out to be higher than earlier preliminary estimates.

Services inflation was revised upwards from 4.2% to 4.4%. This is seen as a cause for concern as it is a measure of the fastest rising wage growth and incomes in years, even with negative real growth.

Energy price inflation in the region was revised to 18.9% in January from an initial 17.2%, down from 25.5% in December.

Inflation remains high, four times the European Central Bank’s (ECB) inflation target of 2%.

However, the latest inflation data suggest that the ECB’s hawks will likely continue to raise interest rates by another half a percentage point in March, even if the overall gauge falls.

ECB Continues to Raise European Rates

Since July, the ECB has raised interest rates by a total of 3% from below zero to curb high inflation.

ECB President Christine Lagarde announced her intention to raise deposit rates from 2.5% to 3.0% at the ECB’s next policy meeting on March 16.

The ECB has said it will raise interest rates by 50 basis points next month and another up to 75 basis points in April, with a peak rate around 3.75%.

Central bank policymakers have grown increasingly concerned that inflation, initially believed to have been caused by an energy-led price surge, is now widening to affect all sectors.

Some economists are concerned that ECB policymakers are not taking a tough enough policy on interest rates and believe interest rates should be raised until inflation picks up significantly. increase. Others say that February’s improvement in economic data should be seen as a reason to push forward with rate hikes.

Markets are currently pricing in long-term inflation at just over 2.4%, but ECB Governor Isabel Schnabel said last week that the move toward a “broader disinflation” had yet to start, suggesting that the market would not expect sustained inflation. We said we may still be underestimating.

Mr Chamberl said a turnaround in underlying inflation would not be enough to stop further rate hikes, as lower energy costs would likely be the main driver of the shift.

US counterparts are slowing the pace of rate hikes

At the same time, the Fed’s ECB counterpart backed a decision to slow the pace of interest rates at its January policy meeting, but the new pace will depend on the persistence of high inflation over the coming weeks.

Fed officials agree that interest rates still need to rise, but a series of small rate hikes will allow them to better monitor economic data going forward and prevent a sharp decline in market performance. bottom.

The central bank raised its target rate by 0.25 percentage points in February to a range of 4.5-4.75%.

The Fed has raised US borrowing rates by more than 50 basis points for five consecutive months since summer 2022.

Reuters contributed to this report.