Inflation in Europe Falls to Slowest Pace Since Russian Invasion of Ukraine

Inflation in the euro zone fell to 6.1% in May, its slowest pace since February 2022, as the war in Ukraine and rising interest rates began to weigh on consumer prices.

The European Union’s statistics agency, Eurostat, said on Thursday that the annual rate of inflation for the 19 countries that use the euro fell from 7.0% in April.

The slowdown was driven by a decline in energy prices, which fell by 4.1% in May from a year earlier. Food prices also rose more slowly, up 4.2% in May from a year earlier.

Core inflation, which excludes food and energy prices, fell to 3.8% in May from 4.4% in April.

The slowdown in inflation comes as the European Central Bank (ECB) has begun to raise interest rates in an effort to combat rising prices. The ECB raised its benchmark interest rate by 0.25 percentage points in June, and is expected to raise rates again in July.

The ECB’s rate hikes are likely to further weigh on economic growth, which is already slowing due to the war in Ukraine. However, the ECB is under pressure to act to control inflation, which is at its highest level in 40 years.

The slowdown in inflation is a welcome relief for consumers, but it remains to be seen whether it will be sustained. The war in Ukraine could continue to push up energy prices, and the ECB’s rate hikes could also weigh on economic growth. As a result, inflation could start to rise again in the coming months.

What does this mean for the ECB?

The slowdown in inflation is likely to give the ECB some breathing room, but it is too early to say whether it will mean the end of the central bank’s tightening cycle. The ECB has said that it will continue to raise rates until inflation is back under control. However, if inflation continues to fall, the ECB may be more likely to pause its rate hikes.

The ECB will next meet on July 21st, and it will be interesting to see what the central bank does at that meeting. If inflation continues to fall, the ECB may decide to pause its rate hikes. However, if inflation starts to rise again, the ECB may decide to continue raising rates.

The ECB is in a difficult position. It needs to control inflation, but it also needs to avoid choking off economic growth. The central bank will need to carefully balance these two objectives in the coming months.

Gerald Foster
Financial Desk