Europe’s central bank hints at more rate hikes even as some prices come down
The inflation rate in the euro zone eased for the fourth straight month, with data from the European Central Bank reporting an 8.5% increase in the consumer price index from a year earlier, lower than January’s 8.6% rate thanks to falling energy prices.
Still, the inflation reading is higher than the 8.2% rate expected as food, alcohol, and tobacco prices increased compared to the previous month. As inflation is still rising in some of the economic bloc’s biggest markets–including Germany, France, and Spain–the European Central Bank (ECB) is expected to continue raising interest rates for the time being. Italy was the only one of the euro zone’s four largest economies to see a drop in inflation.
Christine Lagarde, the president of the ECB, likely wants to see a faster decline in inflation before changing the bank’s long-term strategy. She told a news outlet in Spain on Thursday (Mar. 2) that the bank would likely raise interest rates in March, before clarifying that “It’s possible we will continue on that path—by which amount at each and every meeting it’s impossible to say.”
One of the factors contributing to Lagarde’s hesitancy to change course is that the euro zone’s measure of core inflation, which excludes unstable items like food and energy, went up to 5.6% from 5.3% in January.
Core inflation is considered a more accurate barometer for long-term price prediction because it excludes isolated events like geopolitical tensions or extreme weather events. The price of services also grew, indicating that wage increases are becoming a major factor in a growing inflation rate.
Service price inflation, as opposed to inflation in the cost of goods, is often driven by an increase in wages. With record numbers of strikes and other activities by organized labor in Europe, particularly in France, the annual rate of change for negotiated wage rates almost doubled in 2022.
This has led some to warn of the risk a “wage-price spiral,” where consumer prices rise in response to high wages, creating further inflation—although some analysts dismissed the prospect as “unlikely.”Â
With the unemployment rate in the Eurozone at 6.7%, just a touch higher than October’s record low of 6.6%, workers are seemingly in a strong bargaining position. And, in an account of the ECB’s February meeting released on Thursday (Mar. 2), members concluded that “the labor market remained exceptionally tight,” adding that the central bank expected price pressures acting on labor-intensive services unlikely to stop anytime soon.
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