Core inflation in the euro area has accelerated and remained stubbornly high in June, according to a preliminary reading released on Friday. The headline inflation rate in the 20 euro-sharing countries reached 5.5% this month, slightly lower than analysts’ projections. However, core inflation, which excludes energy and food prices, remained high and rose to 5.4%, with price growth in the service sector also increasing to 5.4% from the 5.0% recorded in April.
Economists are now concerned that the latest deterioration in core inflation may overshadow any improvement in the headline inflation gauge. Despite a slight easing from 5.6% in April to 5.3% in May, the Eurozone’s core inflation is likely to remain well above the 5% mark in the coming months, requiring further interest rate hikes by the European Central Bank (ECB). Ulrike Kastens, an economist for Europe at DWS, stated, “The core rate is likely to remain well above the 5% mark in the next months which will [require] further rate hikes by the ECB.”
Experts attribute the persistent high inflation to base effects and statistical distortions, which are expected to keep the core reading elevated in the next few months. This indicates that the ECB will likely continue hiking interest rates at least until September. Maeva Cousin, Bloomberg’s senior economist, said, “Base effects and statistical distortions are likely to keep the core reading elevated over the next couple of months and see the ECB hiking at least until September.”
The European Central Bank will closely monitor consumer price growth due to the persistently high inflation. On June 15, the ECB raised interest rates to their highest level in 22 years. The benchmark rate was increased by 25 basis points to 4%, marking the ninth consecutive rate hike.
This latest development in core inflation highlights the challenges faced by the Eurozone’s economy. High inflation erodes consumers’ purchasing power and increases costs for businesses, leading to potential economic slowdown. It also puts pressure on central banks to implement measures, such as interest rate hikes, to mitigate inflationary pressures and maintain price stability.
As a result, the European Central Bank’s decision to raise interest rates reflects its commitment to controlling inflation and ensuring the stability of the euro area’s economy. However, these rate hikes may have broader implications for businesses and consumers. Higher borrowing costs can deter businesses from investing and lead to increased debt burdens for households. Therefore, the ECB’s monetary policy decisions must strike a delicate balance between addressing inflationary pressures and supporting economic growth.
In conclusion, core inflation in the euro area remains a concern as it continues to remain high and even accelerate in certain sectors. The European Central Bank is expected to take further actions, including additional interest rate hikes, to address the persistent inflationary pressures. While these measures aim to maintain price stability, they also introduce potential risks to economic growth and consumer affordability. Monitoring and managing inflation levels will remain a top priority for the ECB as it navigates the complex economic landscape in the Eurozone.