For the first time since 2020, producer prices in the euro zone have fallen again year-on-year. In May they fell by 1.5 percent. This strengthens hopes of further declining inflation.
Producer prices in the eurozone have fallen year-on-year for the first time since the end of 2020. As reported by the Eurostat statistics office in Luxembourg, producer prices fell by 1.5 percent in May compared to the same month last year. Compared to April, there was a decrease of 1.9 percent.
Last summer, manufacturers’ prices in the industry shot up by more than 40 percent. The trigger was the consequences of the Russian attack on Ukraine. In recent months, producers have gradually lowered the high prices. Month-on-month, these fell for the fifth month in a row.
Important indicator for inflation development
The fact that energy prices fell by 13.3 percent year-on-year had a particularly positive effect. Compared to April, energy prices fell by 5.0 percent. Excluding the energy sector, producer prices climbed by 3.4 percent within a year. In April, this figure was 5.1 percent.
The development of producer prices is considered an important indicator of consumer prices. However, the relationship is by no means linear. While last summer’s price spikes did not fully feed through to inflation, a year-on-year decline in consumer prices is still a long way off.
inflation expectations sink
Thanks to falling energy prices, inflation in the euro area is gradually falling. Consumer prices in June were only 5.5 percent above the previous year’s level. In May, inflation was still 6.1 percent, after 7.0 percent in April.
According to a recent survey by the European Central Bank (ECB), consumers are expecting inflationary pressure to ease further. On average, they assumed in May that the rate of inflation would be 3.9 percent over the next twelve months. In April they had expected 4.1 percent. In three years, an unchanged value of 2.5 percent is assumed. However, this would mean that the ECB would still miss its inflation target of two percent.
Visco: Inflation can also fall without interest rate hikes
According to ECB Governing Council member Ignazio Visco, inflation can fall without further rate hikes. This can be achieved by keeping interest rates at a reasonable level for a sufficient period of time, according to the Italian central bank governor. Interest rates have already entered a restrictive zone. Carefully determining the duration of monetary tightening rather than further hikes would have the benefit of allowing the ECB to assess the impact of its past rate hikes, Visco said.
In the fight against inflation, the ECB has already raised its key interest rate eight times in a row by a total of 4.00 percentage points. For the next interest rate meeting this month, many experts are expecting a further increase of a quarter percentage point to 4.25 percent.