why it matters
Although the European economy is more resilient than many forecasters expected, it is still significantly weaker in the past 12 months due to lower inflation-adjusted wages and consumer confidence. Growth is expected to accelerate, but further interest rate hikes could put a brake on the economy.
gita gopinath The International Monetary Fund’s first deputy managing director said this week that the “unpleasant truth” is that central banks need to remain diligent about keeping inflation down “even if it means risking slower growth”. said.
The same message is coming from the ECB, which has already hinted at possible rate hikes in July and September. “Eurozone inflation is too high and will remain so for too long,” ECB President Christine Lagarde said this week at the 10th Annual Central Bank Conference in Sintra, Portugal. rice field.
The rapid rate hike has drawn criticism from political leaders such as Italian Prime Minister Giorgia Meloni, who despised “the ECB’s simple recipe for rate hikes.” in speech to Congress on Wednesday.
Background
Inflation in the eurozone peaked at 10.6% in October, boosted by higher energy and food prices last year after the coronavirus pandemic eased and Russia invaded Ukraine.
Since then, inflation has slowed across the euro area. France’s annual inflation rate fell to 5.3% in June from 6% in May. Interest rates in Italy fell to a 14-month low of 6.7%, down from 8% last month.interest rates in spain 1.6 percentGovernment subsidies on gas tariffs help keep them low.
In Germany, Europe’s largest economy, annual inflation rose to 6.8% from 6.3% in May. But analysts said the price hike was almost entirely due to the government’s subsidized rail fare cuts last June. German inflation is expected to fall again in September.
Slovakia’s 11.3% was the highest in the euro area.
Inflation remains well above the central bank’s 2% target, despite expectations that European inflation will continue to fall. In an effort to reach that target, policy makers took steps to raise interest rates, raising the deposit rate to 3.5% in June, the highest in 22 years.
The ECB’s main policy rate was minus 0.5% before it started raising rates last year.
Why does inflation last so long?
“This persistence is driven by the fact that inflation is cascading across the economy as different economic agents try to pass the costs on to each other,” Lagarde said this week.
While economists often dwell on the risk that wage and price spirals will accelerate inflation, there is recent evidence that the pursuit of corporate profits is pushing prices higher, even as energy prices have fallen sharply since last year’s peak. is increasing.
“Rising corporate profits accounted for almost half of the rise in inflation in Europe over the past two years, as firms have raised prices more than they have raised the cost of imported energy,” the economists said. The IMF said this week:.
“European businesses have historically been better protected from rising costs than workers,” the IMF said. Inflation-adjusted earnings were above pre-pandemic levels, but workers’ compensation was 2% below trend in the first quarter of this year.
