Despite a series of measures by governments on the continent to make it easier for residents, inflation in the eurozone also soared in June, standing at 8.6% on an annualized basis (compared to June 2021). The figures were released today (Friday), and are expected to increase pressure on the European Central Bank to raise interest rates more aggressively at its next meeting during July. Inflation was forecast to rise to 8.4%, from 8.1% in May. The increases were larger than expected in the energy sectors (an increase of 41.9% per year) and food (an increase of 8.9% per year).
The data surprised many analysts, partly because inflation in Germany – the largest economy in the eurozone – actually fell by a few percent in the past month. However, this is probably due to a massive subsidy for public transport (a “free-monthly” ticket in all of Germany for nine euros a month) as well as a subsidy for petrol and diesel in the country. At the eurozone level, inflation rose by 0.5% in just one month. These are preliminary estimates by the European Bureau of Statistics (Eurostat), which could change in the coming weeks. The highest inflation rate was recorded in Estonia, with 22%. In Belgium, the price index rises by 10.5%, in Spain by 10% and in Portugal by 9%, according to estimates.
Surprising figures increase pressure on the European Central Bank (ECB) to act more aggressively against inflation, raising interest rates in July by 0.5%, instead of 0.25% as announced during the previous month. The president of the bank, Christine Lagard, said this week at a meeting of the governors of the western central banks in Portugal that the bank “will take into account the inflation data” published today. She said the bank might abandon the “gradual” approach to raising interest rates, and adopt higher levels, similar to the move taken by the US Fed last month, which raised interest rates by 0.75%, instead of 0.5% as planned. The meeting of the Governor of the European Central Bank is expected to take place on July 21. The interest rate on deposits in the eurozone is now minus 0.5%.
However, the European Central Bank has to deal in parallel with a possible debt crisis for southern European countries that such an interest rate hike could entail. The debt ratio of the GDP of countries such as Greece and Italy is higher than it was during the 2011 debt crisis in the union, and raising interest rates is expected to threaten their financial situation. To support their debt. However, the move may have the opposite effect on inflation, preventing its significant decline.