By Jack Barnett
Inflation in Europe is falling much faster than expected, further marking Britain out as suffering the toughest price pressures in the developed world.
The rate of price increases in the 20 countries using the euro dropped to 6.1 per cent last month, down from seven per cent in the previous month, according to eurostat.
That drop was much steeper than the fall to 6.3 per cent that analysts had predicted.
In a big boost to the European Central Bank, core inflation – which strips out volatile food and energy price movements and is seen as a more accurate measure of underlying price pressures – dropped to 5.3 per cent, down from 5.5 per cent, again, lower than analysts’ forecasts.
Last month’s fall was mainly driven by energy prices continuing to descend from their historic highs reached after Russia’s invasion of Ukraine.
The cost of gas, electricity and other energy materials fell 1.7 per cent over the year to May, down from a more than two per cent rise in April. In May last year, energy prices increased nearly 40 per cent.
Russian president Vladimir Putin yanked gas supplies out of the European energy market in response to sanctions levied on the Kremlin after their full-scale invasion of Ukraine.
That propelled energy prices and prompted economists to warn Europe was course for sweeping blackouts and a tough recession, neither of which have really materialised due to the bloc rapidly pivoting to liquified natural gas imports.
Germany however, the common currency area’s economic powerhouse, did slip into a recession over the winter after GDP figures last week for the first three months of this year were revised sharply lower.
Europe’s inflation fall further illustrates that the UK is grappling with the stickiest inflation problem in the rich world.
US inflation has been steadily falling since last summer and is running at 4.9 per cent.
Core inflation leapt to 6.8 per cent from 6.2 per cent, while services inflation – which the Bank monitors closely – hit 6.9 per cent.
That upside surprise has prompted economists to round behind bets on Bank governor Andrew Bailey and the rest of the monetary policy committee lifting interest to at least 5.25 per cent, possibly even 5.5 per cent.
That would mean at least three more rate rises will be pushed through this year.
European Central Bank officials meanwhile are tipped to raise rates at least one more time this year, while the US Federal Reserve is anticipated to pause raising borrowing costs at its next meeting.
Their respective official rates at 3.25 per cent and a range of five and 5.25 per cent.
The European “labour market still looks very tight – other data published this morning showed that the unemployment rate edged down to 6.5 per cent in April. As a result, we suspect that the core inflation rate will come down only slowly and it will be a long time before it hits two per cent,” Jack Allen-Reynolds, deputy chief eurozone economist at consultancy Capital Economics, said.
“And we still think the ECB will raise interest rates by 25basis points at its meeting on 15June and probably once more at the July meeting,” he added.
Hiking rates to 5.25 per cent would mean the Bank of England would surpass the Fed in its tightening cycle.
The post Euro inflation slumps faster than expected to 6.1 per cent leaving UK further afield appeared first on CityAM.
