Inflation in the eurozone is falling faster than expected
What it means: Rising energy and food prices have been tamed.
Energy prices shrank 11.5 percent from a year ago, when fuel and electricity costs rose nearly 35 percent due to a shortage of energy supplies during Russia’s war in Ukraine. Food prices rose 6.9 percent, about half the pace of a year ago.
Excluding food and energy prices, so-called core inflation rose 3.6 percent, a significantly slower pace than previous months.
Governments in France, Germany and Spain have been working to reduce food and energy bills to help consumers hit by the cost of living. In Belgium, prices fell for the second month in a row. “The process of disinflation is happening even faster than we expected,” said Bert Colijn, senior eurozone economist at ING Bank, in a letter to clients. “This shows that signs of an impending victory over inflation for the European Central Bank are increasing.”
Behind the numbers: Major economies are seeing sharply lower prices.
German inflation fell more than expected to 2.3 percent from a year ago, helped by easing price pressures in all sectors of the economy. The government has been subsidizing food and energy households, but that program will soon be phased out.
In Spain, annual inflation fell to 3.2 percent in November due to cheaper fuel and deeply discounted travel deals in the tourism sector, a major driver of growth.
Inflation in the French economy stood at 3.8 percent in November from a year ago, compared to 4.5 percent in October, Eurostat said.
“It is a real success that we have managed to get inflation under control in two years. In the 1970s it took ten years,” Bruno Le Maire, the economy minister, said in an interview on France’s Inter radio on Thursday. “The price we have to pay is higher interest rates, more difficult financing and therefore an economic slowdown,” he added.
Keep in mind that inflation is expected to persist as growth slows.
Central bank governor Christine Lagarde said last month that while inflation has fallen sharply, prices are “still expected to remain too high for too long and domestic price pressures remain strong.”
The central bank has been raising interest rates since July 2022 to curb rising inflation caused by a rise in energy prices last year. Interest rates have been raised from below zero and are now at the highest level in the central bank’s 20-year history.
But Europe faces a prolonged economic slowdown as high interest rates and the lingering fallout from Russia’s war in Ukraine continue to curb activity. The eurozone economy grew at an anemic annual rate of just 0.1 percent from July to September clearly faster growth in the United States during the same period.
Looking ahead: There is increasing talk of a reduction in interest rates in the Eurozone
The downturn underlines the challenges facing policymakers at the European Central Bank, which halted its interest rate hike campaign last month amid signs the region’s economy has weakened.
Officials are now focusing on how long to keep interest rates high to reduce inflation to the central bank’s target of 2 percent. They are still concerned about factors such as wage growth and possible spikes in the energy market that could push inflation back to higher levels, Mr Colijn said. His bank is among those that expect the ECB to cut interest rates next year, possibly before the summer.