The Situation In The Eurozone Is Improving, The EU Expects Inflation To Drop
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Inflation across Europe has continued its downward movement. Another positive report of this indicator is expected.
Previous data
The cost of living in the eurozone fell slightly slower than previously thought in early 2023.
According to Eurostat, the consumer price index for the common currency bloc fell by 0.2% on a monthly basis.
This reduced the annual growth rate from 9.2% in December to 8.6% in January (preliminary: 8.5%).
A similar story occurred at the baseline, which excludes food, energy, alcohol and tobacco products, with the core printed CPI year-on-year at 5.3% (preliminary: 5.2%), down from 5.2% a month earlier.
Compared to the previous month, processed food, alcohol and tobacco increased the most by 1.5%, while energy prices increased by 0.6%.
On the other hand, prices of non-energy industrial goods fell by 1.9% and services by 0.1%.
Energy prices the main driver of inflation
The record inflation in the euro area was due to a spike in energy prices, which started to increase at the end of 2021. The first spike in energy prices came as countries exited or lifted Covid restrictions and energy demand began to recover.
The second jump occurred in 2021 due to the emergence of problems on the supply side. This development was exacerbated in early 2022 by the Russian invasion of Ukraine as the conflict interrupted the supply of Russian oil or natural gas to the rest of Europe.
Baltic countries were the worst
Most eurozone countries saw a decrease in inflation compared to December, but nine countries saw a rise in the consumer price index. Moreover, 12 countries remained in the double digits territory in January.
Hungary is experiencing the highest inflation levels at around 26.2% among these. Latvia, Czechia, Estonia, and Lithuania come next, where inflation remains high at 21.4%, 19.1%, 18.6%, and 18.5%, respectively. The report noted that rising food and energy prices contributed the most to the annual inflation in January.
Forecast
Inflation in the euro zone is falling and is expected to fall again to 8.2% from 8.6%. Such a reading may mean that the ECB's actions are slowly becoming visible in the economy.
Interest rates
To tame rising inflation, the European Central Bank (ECB) started to raise interest rates after 11 years of loose monetary policy. In July last year, the central bank raised the three key ECB interest rates by 50 basis points.
Last week, European Central Bank chief Christine Lagarde reiterated that the central bank aims to raise its interest rates by a half percentage point in March. “In view of the underlying inflation pressures we intend to raise interest rates by another 50 basis points at our next meeting in March,” Lagarde said.
Mood improvement
Growth in economic activity in the euro area accelerated to a nine-month high in February, reflecting an improvement in the performance of the services sector and a return to growth in industrial production.
Growth was boosted by rising confidence as recession fears subsided and inflation shows signs of peaking, although industry also benefited from a significant improvement in supplier performance.
The February recovery was supported by the services sector, where business activity increased for the second month in a row. The seasonally adjusted index rose from 50.8 in January to 53.0, the strongest increase since June last year.
In terms of manufacturing, chemicals and plastics and basic resources remained major areas of weakness, while the production of food and beverages, household goods and manufactured goods showed further signs of recovery.
Source: investing.com, ec.europa.eu/eurostat
