Dhe inflation in the euro area was 8.5 percent in February. This was announced by the European statistical office Eurostat on Thursday after an initial estimate. The rate was 8.6 percent in January and 9.2 percent in December 2022.
This means that inflation in the euro zone is still well above the European Central Bank’s (ECB) target of 2 percent. ECB President Christine Lagarde has announced that the central bank intends to raise key interest rates by another 0.5 percentage points at the next ECB Council meeting in two weeks time on March 16th. Bundesbank President Joachim Nagel explained that this should by no means mean the end of the interest rate hikes. He also calls for the central banks’ holdings of bonds from the bond purchase programs to be reduced faster than planned. If inflation is proving so persistent, Nagel said, monetary policy will have to be even more persistent. ECB President Christine Lagarde also said on Spanish television that the European Central Bank’s planned interest rate hike of half a percentage point in two weeks will probably not be the end of the road.
Higher inflation rates in France and Spain
While there are signs of a certain calming down in energy prices after an enormous increase in the past year and the development of food is inconsistent, the prices for services are now also increasing noticeably in some cases. Energy price inflation fell, rising 13.7 percent for the year after 18.9 percent in January. Grocery, alcohol and tobacco prices rose 15 percent from 14.1 percent in January. And services, which had previously stagnated, are now up 4.8 percent, noticeably more than in January and December.
In addition, political interventions that are either beginning or ending are having an impact on the inflation rate in several euro countries. In some cases, wages are now also rising significantly as a reaction to the high inflation, albeit often not quite by the level of inflation, so that real wages, i.e. wages after deducting inflation, tend to be falling. ECB Executive Board member Isabel Schnabel has at least indicated that the central bank is monitoring very closely whether this will result in a new wave of costs.
Core inflation, which is price increases without strongly fluctuating prices such as those for energy and food, has risen significantly. It increased from 5.3 to 5.6 percent. Monetary politicians pay very close attention to this rate because it describes the “underlying inflation” beyond the usual fluctuations.
According to the national method of calculation, the inflation rate in Germany remained at 8.7 percent in February. According to the European calculation method of the Harmonized Index of Consumer Prices (HICP), however, it rose slightly from 9.2 to 9.3 percent. The Federal Statistical Office recently revised the consumer index for the national calculation method and switched to a new base year. One of the consequences of this was that the inflation rates of the two methods of calculation deviated more from each other. The European calculation method is taken into account for monetary policy, these are currently the higher values.
The large euro countries France and Spain also reported higher inflation rates for February. In France, the inflation rate rose from 7 to 7.2 percent. In Spain, which had had unusually low inflation among euro countries for a while, the rate rose from 5.9 to 6.1 percent.
On the bond market, the sometimes unexpectedly high inflation rates in some euro countries had fueled speculation that the ECB would take tougher action. As a result, the yield on ten-year Bunds temporarily reached its highest level since 2011.
In March, a technical effect could lower the rate
March could now be an exciting month in terms of inflation: then inflation rates could drop noticeably, at least that’s what economists hope.
The reason is a so-called statistical base effect: A year ago, in March, immediately after the start of the Ukraine war, energy prices rose exceptionally sharply. Since then, the inflation rate, which compares the current level of consumer prices in a month with that of the same month in the previous year, has been particularly high.
From March onwards, however, the current level of energy prices will be compared with that of the period after the start of the war. Then the rates of price increases over the year are no longer quite as high. In any case, Jens Ulbrich, the chief economist at the Bundesbank, expects a certain calming of the “headline inflation”, i.e. the overall inflation rate, from the spring onwards due to the energy prices.