At the beginning of the year, the inflation rate in the euro zone fell more sharply than economists had forecast. In January, consumer prices climbed by 8.5 percent within a year, according to a first estimate from the statistics office Eurostat on Wednesday. Inflation was 9.2 percent in December and 10.1 percent in November. The third monthly decline in a row is due to falling energy prices.
The surprisingly low rate of inflation is likely to exacerbate discussions in the ECB Council about future interest rate policy. Most recently, there were also voices in the committee that urged slowing down the pace of the increases. The ECB will decide on the base rate on Thursday. After four rate hikes, some of which were record high, the base rate has been 2.5 percent since December. Experts expect the central bank to add another 0.5 percentage points at its next meeting. The question is how to proceed from there. There was already speculation on the financial markets that the monetary watchdogs could even decide to cut interest rates in 2023 – a speculation that was immediately rejected by the ECB grandees.
The goal: two percent inflation rate
The euro zone faces a similar dilemma as the US. Inflation rates are falling there too. However, the monetary authorities want to signal determination in their fight against inflation. As a reminder, both central banks are aiming for a maximum inflation rate of two percent. At the same time, there are fears that further increases in interest rates could slow down economic development. It’s a tightrope walk.
In December, the US consumer price index fell to 6.5 percent, well below 7.1 percent in November and the peak of 9.1 percent in June 2022. The Federal Reserve will deliberate on the key interest rate on Wednesday evening. The decision had not yet been made at the time of going to press. Experts expect an increase of 0.25 percentage points. The Fed had raised interest rates at a rapid pace last year, from almost zero percent to more than 4.25 percent. In December, the Fed predicted it would hike rates to just over 5 percent this year.
Although energy prices in the euro zone rose significantly by 17.2 percent in January, the momentum has slowed. For comparison: in December it was still 25.5 percent. However, the so-called core inflation, in which the volatile energy, food, alcohol and tobacco prices are calculated, remained at the high value of the previous month of 5.2 percent. “Core inflation did not rise further to 5.3 percent only because Eurostat updated the shopping basket, which is why the sharp fall in prices for package tours that was usual in January was included in the calculation with double the weight,” tweeted Jörg Krämer, chief economist at Commerzbank . “There is still no all-clear for the ECB.”
Economists look to core inflation because it shows the extent to which companies are passing inflation on to consumers. In its most recent economic forecast, the International Monetary Fund also emphasized that the central banks should not let up despite initial successes in their fight against high consumer prices. The battle is not yet won.
However, Eurostat had to use its own estimate for the consumer price data for Germany, as the Federal Statistical Office postponed the publication planned for Tuesday due to technical problems. The Federal Statistical Office announced that the system had collapsed in connection with the revision of the calculation of the consumer price index, which is carried out every five years. “Therefore, there could be an unusually high need for revision of the final inflation values,” warned Helaba expert Ralfcircul. Such a breakdown has probably never happened before. “I’ve been analyzing economic data for 30 years, I can’t remember that an announced inflation publication had to be postponed,” said chief economist Krämer.
Fed Chair Jerome Powell will have a similarly tricky communication task in the evening as EC President Christine Lagarde did on Thursday. Both somehow want to keep the financial markets happy by promising two things: to achieve a soft landing for the economy with their interest rate policy and at the same time to curb inflation to such an extent that – and this is what the stock markets dream of – a return to loose monetary policy is possible.