Core Inflation Soars to Record High in Eurozone

The south facade of the European Central Bank (ECB) headquarters in Frankfurt, Germany, on Dec. 30, 2021. (Reuters/Wolfgang Rattay

Core inflation soared to a record high in the eurozone in January, as the bloc’s energy crisis continues.

The euro bloc is currently facing the worst energy crisis in decades, after the Russia–Ukraine war caused gas and oil prices to soar.

Last month, Europe’s consumer price index showed inflation in the euro bloc hitting a record 8.6 percent, but down from 9.2 percent in December, according to revised data from the European Union’s statistics agency Eurostat, on Feb 23.

The January report also confirmed that inflation declined for the third consecutive month in the 20-member bloc.

Latvia had the highest inflation rate in the monetary region, at above 21 percent, while Luxembourg and Spain had the slowest, at just under 6 percent.

Inflation Continues to Rise in Europe, Despite Recent Slowdown

Meanwhile, the eurozone’s core inflation rate, which does not take into account food and energy prices, was 5.3 percent in January, up from its December’s 5.2 percent, said Eurostat.

Revised headline inflation numbers for last month also spiked, after Germany’s data turned out to be higher than the previous preliminary estimate.

Services inflation was revised up to 4.4 from 4.2 percent, which is seen as a concern, as it is a bellwether for wage growth and earnings, which are now rising at their fastest pace in years, even if real growth is negative.

Energy price inflation in the region was revised to 18.9 percent in January from an initial 17.2 percent, falling below the 25.5 percent in December.

Stubbornly high inflation levels are currently running at four times the European Central Bank’s (ECB) inflation target of 2 percent.

However, the latest inflation data will likely encourage the hawks at the ECB to continue raising interest rates by another half-point in March, even as the overall gauge dipped.

ECB Will Continue to Raise European Interest Rates

Since July, the ECB has raised rates by a combined three percentage points from below zero in an effort to control high inflation.

ECB president Christine Lagarde earlier announced that her colleagues intend to lift the deposit rate to 3.0 percent from 2.5 percent at the ECB’s next policy meeting on Mar. 16.

The ECB has said that it would raise interest rates by 50 basis points next month, with another round of up to 75 basis points in April, putting the peak rate in the vicinity of 3.75 percent

Central bank policymakers are increasingly concerned, the inflation is now broadening out to impact all sectors, after initially believing that it was led by an energy driven price surge.

Some economists are concerned that ECB policymakers will not take a hard enough line on interest rates, which they think should be increased until there is a clear turnaround in inflation gains. Others say that improved economic data in February should be seen as grounds to push on with the rate-hike policy.

Markets are currently pricing in long-term inflation at just over 2.4 percent, while ECB board member Isabel Schnabel stated last week that markets may still be underestimating persistent inflation, as the move toward “broad disinflation” has not begun.

Schanbel said that even a turnaround in underlying inflation is not enough to stop additional rate hikes, as the decline in energy costs would probably act as the primary factor for the shift.

American Counterparts Are Slowing Down the Pace of Rate Hikes

At the same time, the ECB’s counterparts at the Federal Reserve backed a decision to slow the pace of interest rates at its policy meeting in January, but the new pace depends on the persistence of high inflation over the coming weeks.

Fed officials agreed that rates still need to move higher, but that a series of smaller rate hikes would allow them to better monitor incoming economic data, to prevent a sudden downturn in market performance.

The central bank raised its target benchmark interest rate by 0.25 percentage point in February, to a range of 4.5–4.75 percent.

The Fed had previously raised U.S. borrowing rates for five consecutive months by 50 basis points or higher, since the summer of 2022.

Reuters contributed to this report.