Eurozone Inflation Rises as Policymakers Weigh Rate Increase

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The eurozone’s overall rate of inflation ticked up in April, with the cost of food remaining high. But there was a bit of good news: After subtracting prices for food and energy, which tend to be volatile, the underlying inflation rate eased for the first time in 10 months.

Inflation across the 20 countries using Europe’s common currency increased at an annual rate of 7% in April, from 6.9% in March, data released Tuesday by the European Union’s statistics office showed. Prices for food, which rose 13.6%, were the main factor. So-called core inflation, when food and energy prices are stripped out, inched lower to 5.6%, from 5.7% in March.

Core inflation is closely watched by European Central Bank policymakers, who will decide whether to continue raising interest rates to curb inflation when they meet Thursday. The bank has already raised rates for seven straight meetings.

Why It Matters: The goal is to control inflation while preventing a recession.

The International Monetary Fund recently said that taming inflation while avoiding a recession was Europe’s biggest challenge in the months to come, as the continent continues to digest the impact of the war in Ukraine on its economy.

So far, the European Central Bank’s campaign to raise interest rates has helped drive overall inflation down from a peak of 10.6% in October. The eurozone has avoided a recession, but economic growth remains modest.

Data on lending released Tuesday by the central bank showed that demand for consumer credit was weakening, as banks made it more difficult for borrowers to receive credit and high interest rates for borrowing caused demand to fall, further cooling the economy.

But policymakers warn they are looking for indications that prices will be coming down over the long term.

“We must see a sustained decline in core inflation that gives us confidence that our policies are starting to work,” Isabel Schnabel, a member of the central bank’s executive board, said in an interview with Politico last week.

Country by Country: Rates remained high in the Baltics but dropped in Germany.

Baltic countries and Slovakia had double-digit price increases, as high as 15% for Latvia. Some of the larger European economies with lower rates are dealing with pressure from workers seeking wage increases to keep up with the increased cost of living.

The diverging rates also reflect domestic measures that governments have introduced to rein in energy prices. As the summer vacation season picks up, countries with strong tourism markets are also poised to see the impact of rising service prices.

In Germany, Europe’s largest economy, the annual rate of inflation eased to 7.6% from 7.8% in March. Food prices remained stubbornly high, while government intervention to tame energy costs began to take hold.

Workers in Germany’s public sector secured a deal to give 2.5 million employees a 5.5% pay increase next year. That pact is expected to set a precedent for other pay talks and could threaten the European Central Bank’s forecast that eurozone wage growth will peak this year.

In France, which has been plagued for months by waves of strikes over the government’s decision to raise the retirement age, inflation rose to 6.9% in April, from 6.7% in March, driven largely by energy, with the price of services also climbing a little.

In Spain, prices climbed to 3.8% in April, from 3.1% the previous month, as food costs climbed, even as energy prices that had soared to record levels last year continued to drop.

What’s Next: A decision by the European Central Bank.

The inflation data will influence the European Central Bank’s decision on whether to continue raising interest rates in an effort to bring down inflation. The bank’s Governing Council meets Thursday, and most analysts are estimating it will vote to increase rates by either a quarter or a half percent.

The bank raised its deposit rate to 3% last month, the highest since October 2008, as it has sought to cool demand and bring inflation closer into line with its target of 2%.

“Even if headline inflation has come down and will come down further, this is not yet the moment of relief,” said Carsten Brzeski, a chief economist at ING Germany. “The ECB doesn’t want to repeat the previous mistake of underestimating inflation and will therefore be willing to go too far, even if this eventually turns out to be a policy mistake.”

(Author: Melissa Eddy)/(c.2021 The New York Times Company)