Easing energy prices helped lower the annual rate of inflation in the eurozone in November, the first slowdown in a year and a half. But policymakers cautioned that the worst may not yet be over.
Consumer prices in the 19 countries that use the euro as their currency rose at an annual rate of 10% in November, the European Commission reported Wednesday. In October, the rate reached a record 10.6%. Twelve months ago, it was 4.9%.
After months of soaring from one high to the next, energy prices showed signs of slowing, as stocks of natural gas across the European Union remained unseasonably high and temperatures mild.
Although it remained the strongest driver behind eurozone inflation, the annual increase in the price of energy was 34.9% in November, down from a rate of 41.5% a month earlier. The price of food, however, climbed slightly, to 13.6% in the year through November.
Overall, the so-called core inflation rate, which excludes food and energy, remained steady at 5%. The “stickiness” of this rate is expected to weigh on policymakers when they hold their final meeting of the year in December.
Economists said that while the November data signaled a reverse after months of climbing consumer prices for Europe’s common currency bloc, the situation remained precarious.
“Whether this is the peak in inflation remains to be seen,” Bert Colijn, an economist with ING, said in a research note. “Another episode in the energy crisis could easily push inflation back up again and core inflation usually proves to be sticky after a supply shock.`”
In Europe’s largest economy, Germany, (11.3%, down from 11.6%) and Spain (6.6%, down from 7.3%), annual inflation rates cooled in November, thanks to easing energy prices. Consumer prices in France, the currency bloc’s second-largest economy, rose 7.1% from a year earlier, matching October’s increase. Baltic countries, which remain heavily dependent on natural gas, continued to have the bloc’s highest rates of inflation, topped by Latvia at 21.7%.
Such divergences among eurozone countries is a challenge for policymakers and is expected to lead to lively debates on how best to handle the situation. With inflation still well above the 2% targeted by the European Central Bank, some policymakers are warning that it is too early for the bank to slow down.
The head of the ECB warned this week that she did not believe that inflation had reached a summit and made clear that the bank would continue to raise interest rates as part of its efforts to bring down prices. After months of caution, the ECB increased interest rates by three-quarters of a point in both October and November.
“We do not see the components or the direction that would lead me to believe that we’ve reached peak inflation and that it’s going to decline in short order,” Christine Lagarde, the bank’s president, told the European Parliament on Monday. Echoing remarks made last month by the Federal Reserve chair, Jerome Powell, Lagarde then added that she believes that inflation still has “a way to go.”
Analysts have been debating whether the ECB will continue with the more aggressive approach of recent months, or ease back to an increase of only half a percentage point at its next meeting Dec. 15.
Even as inflation has cooled, so has economic growth in the eurozone, which grew just 0.2% from July through September, and analysts and officials are predicting negative growth for the last quarter of 2022.
Earlier this month, Paolo Gentiloni, the European Union’s commissioner for the economy, said he expected the bloc would see a contraction during the winter, although some economists believe it will not be as severe as previously predicted.
The European Union, along with Britain, is suffering from the twin plagues of rising inflation and slowing or declining growth. Russia’s war against Ukraine and retaliatory sanctions against Russia, one of the world’s biggest energy and grain producers, have caused global fuel, food and fertilizer prices to soar. Supply chain disruptions rooted in the pandemic and continuing COVID-19 lockdowns in China have added to the pile of economic problems.
In Britain, consumer prices surged 11.1% from a year earlier in October, the highest rate in more than 40 years. In the United States, prices climbed 7.7% in the year through October, far faster than the roughly 2% pace that was normal before the pandemic
Lagarde also said that she does not believe that the price of energy, which remains extremely high compared to last year, has been fully passed down to households. Several governments have intervened to protect consumers from the high prices, further complicating projections about prices.
At the same time, the ECB remains concerned that workers will start demanding, and winning, wage increases to keep up with the jumps in consumer prices, which would keep inflation elevated and still leave workers with less spending power. So far, that has not happened on a significant scale.
Germany’s I.G. Metall union, which represents 3.9 million workers in the country’s electrical and metalworking sectors, agreed earlier in November to a wage increase that was lower than inflation. The pay deal calls for raising pay by 8.5% over the course of the next two years.
Economists welcomed the agreement for establishing an element of certainty over a longer period of time, which could take some of the pressure off the central bank.
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