Inflation in the euro zone is falling but pressure on prices remains

With the end of winter, inflation levels eased in Europe last month, according to the European Commission reported on Thursday, despite mounting concerns that stubbornly high prices could pressure central bankers to hike interest rates further.

Consumer prices in the 20 countries that use the euro as their currency increased at an annual rate of 8.5% percent in February, down slightly from January’s rate of 8.6 percent. Interest rates have fallen year-on-year since hitting a high of 10.6 percent in October.

But some of the largest economies showed worrying increases, and core inflation – a measure that excludes the most unpredictable categories like food and energy – rose in February to 5.6 percent, from 5.3 percent.

In France, inflation hit 7.2 percent in February, the highest level in more than two decades, while in Spain inflation grew at an annual rate of 6.1 percent. Germany, Europe’s largest economy, reported that inflation had risen to 9.3 percent.

The gloomy economic prospects for Europe forecast last autumn have brightened significantly. Fears of a deep recession proved to be exaggerated. Skyrocketing energy prices have fallen thanks in part to a warm winter and austerity efforts. Nevertheless, the path is bumpy.

Food prices remain high. The war between Russia and Ukraine, big-name exporters of energy and agriculture, has put pressure on the US global food supply and disrupted fertilizer production. Uncertainty over whether Russia will continue to honor an agreement to ease the blockade on Ukrainian ports is also fueling concerns about food supplies.

Devastating droughts in Europe, China, the Horn of Africa and the United States caused by climate change have also contributed to reduced harvests and higher food prices.

Even in Belgium, where inflation fell from 7.4 percent in January to an annual rate of 5.5 percent last month, food prices rose.

An increase in alcohol and tobacco prices was also noticeable.

The Baltic countries continue to have the highest rates among European Union members, with annual rates exceeding 17 percent.

Some of the inflationary pressures can be attributed to governments withdrawing measures such as price controls and subsidies that have softened the impact of rising energy prices on households. In France, electricity prices were allowed to rise for some consumers in February after being frozen.

A recovery in Chinese production could also push prices higher. China’s gigantic manufacturing capacity, combined with its prominent role in the global supply chain, gives it an outsized impact on the global economy, for example by driving up demand for energy.

But analysts are divided on whether the increase in production will ease price pressures by expanding supply or boost consumer spending by making long-awaited goods finally available.

Some economists and policymakers pay particular attention to core inflation because it gives an indication of whether inflation is catching on across the economy.

Companies continued to raise prices sharply in some sectors. Some analysts also fear that pressure from workers to raise wages could fuel inflation further this year.

Inflation, while well below the October peak, is still well above the European Central Bank’s target of 2 percent. Christine Lagarde, the President of the Bank, has said that a Half a point increase This month is anything but safe. In an interview earlier this week, she added that the bank will continue to raise interest rates if necessary to meet inflation targets.

Eswar Prasad, a professor of trade policy at Cornell University, said rising interest rates are putting an unwanted financial strain on governments already struggling with enormous public debt.

He added that “recent inflation data and likely policy reactions are dampening the eurozone’s 2023 growth outlook, which had brightened somewhat earlier in the year.”