Inflation rears its ugly head in Europe, putting the European Central Bank in a fix—once again
An increase in the price of theater tickets, restaurant meals and hotel rooms threatens to derail the ECB’s expected rate cut in September.
Inflation in the 20 countries that use the euro ticked up to 2.6% in July, stubbornly above the European Central Bank’s target and complicating the ECB’s next decision on whether to cut interest rates and boost growth as the economy struggles to stage a convincing recovery after a long stretch of stagnation.
Inflation rose from 2.5% in June, according to official figures Wednesday from the EU statistics agency Eurostat. Services inflation, a figure closely watched by the ECB, remained elevated at 4.0%, down from 4.1%.
The uptick will intensify discussions around the ECB’s next move at its Sept. 12 meeting. The central bank for the eurozone countries made a first tentative interest rate cut in June, lowering its benchmark rate by a quarter percentage point to 3.75%. The bank’s governing council then hit pause at the July meeting, with ECB President Christine Lagarde saying the bank would take its next decisions meeting by meeting based on incoming data about inflation and the economy’s performance.
The ECB along with other central banks including the U.S. Federal Reserve rapidly raised interest rates to combat a spike in inflation sparked by Russia’s invasion of Ukraine and higher energy prices as well as by the sudden rebound of the economy after the pandemic, which strained supplies of parts and raw materials. Europe in particular was hit by higher energy prices after Russia cut off most supplies of natural gas.
Energy prices have fallen and inflation is now down from its peak of 10.6% in October 2022. However, inflation has spread to wages and to services’ prices, a broad category including medical care, theater tickets, restaurant meals, hotel rooms and beauty salons’ prices. As a result, overall inflation has remained stuck between 2% and 3%, short of the ECB’s target of 2% which is considered best for the economy.
The ECB will have another inflation reading from August to digest by the time of its next meeting. Bank officials say they expect inflation to fluctuate around current levels for the rest of the year and to decline to reach their goal by the end of 2025.
Officials at the U.S. Federal Reserve are weighing the timing of a first cut from the current peak of 5.25%-5.5% benchmark range and may use their meeting ending Wednesday to set up a September rate move. U.S. annual inflation was 3.0% in June.
Rate hikes combat inflation by raising the cost of credit for buying things, cooling demand for goods and taking the pressure off prices. But higher rates can hurt growth, and recent economic data have been downbeat as Europe struggles to show a convincing recovery after more than a year of near-zero growth figures.
Gross domestic product rose 0.3% in each of the first two quarters of this year, an improvement on five straight quarters of readings at near-zero or below. But recent indicators of economic activity going forward, such as S&P Global’s purchasing managers’ index, suggest that the economy is still barely growing. One source of strength is the labor market; unemployment remains low at 6.4%.
