Inflation in the eurozone has dipped for the first time in nine months due to slower growth in the price of energy and services, although economists expect it to pick up pace again in the coming months.
The harmonised index of consumer prices in the single currency bloc rose by an annual rate of 1.9 per cent in June, down from a more than two-year high of 2 per cent in June, according to Eurostat.
Core inflation — excluding more volatile energy, food, alcohol and tobacco prices — fell from 1 per cent to 0.9 per cent. Prices of non-energy industrial goods grew at a faster rate, but this was outweighed by drops in services and energy inflation.
Most economists expect eurozone inflation to resume its upward path in the second half of this year, taking it above the European Central Bank’s target of just below 2 per cent and fuelling the debate over how long its ultra-loose monetary policies should continue.
However, the ECB forecasts that inflation will fall back below its target next year and only reach 1.4 per cent in 2023. While some economists think this is an underestimation, they doubt a sustained rise in prices is likely because of the eurozone’s weak labour market.
Unemployment has started to fall recently but the number of jobless people across the EU is still 1.9m above its pre-pandemic level, at 15.4m. The ECB estimates a similar number of people have been furloughed or dropped out of the workforce altogether.
Andrew Kenningham, economist at Capital Economics, said: “We suspect that headline inflation will rise to over 2.5 per cent by the end of the year, but that it will then fall back to only around 1 per cent in 2022 and will stay low over the medium term.”
Inflation has rebounded in many countries after pandemic restrictions were lifted and the pace of vaccinations accelerated, boosting businesses’ order books and consumer spending. This has prompted calls from some economists for central banks to start reining in their stimulus policies.
Eurozone inflation will receive a technical boost later this year because of the effect of Germany’s temporary value added tax cut, which was imposed in July 2020 for six months.
There are also signs that shortages of materials, such as semiconductors and steel, and soaring commodity prices are starting to feed into higher producer prices around the world. The price of goods leaving China’s factories rose 9 per cent in May from a year earlier, its fastest pace since the 2008 financial crisis.
The European Commission said on Tuesday that its latest survey of EU businesses recorded a fourth consecutive month of increased selling price expectations, which rose to a record high for retail and industrial businesses.
Earlier this week Jens Weidmann, president of Germany’s central bank, warned that “upside risks” to the inflation outlook were “predominant”.
However, most economists believe this year’s inflationary surge will be temporary.
“Recent rises in Western European inflation have largely been driven by energy prices, while output gaps remain large and demand-side inflation pressures modest,” Ken Wattret and Venla Sipila-Rosen, economists at IHS Markit, wrote in a report this week.
Source: Economy - ft.com
