Europe's inflation is up after months of decline. It could mean a longer wait for interest rate cuts
Inflation is on the rebound in Europe
FRANKFURT, Germany (AP) — Inflation plaguing Europe rose to 2.9% in December, rebounding after seven straight monthly declines. The rise in price levels cast doubt on predictions for speedy interest rate cuts from the European Central Bank.
The figure released Friday was up from the 2.4% annual inflation recorded in November — but is well down from the peak of 10.6% in October 2022.
ECB President Christine Lagarde warned that inflation could tick up in coming months, taking a detour from its recent downward path. The central bank for the 20 European Union countries that use the euro currency has raised its benchmark interest rate to a record-high 4% and says it will keep it there as long as necessary to push inflation down to its goal of 2% considered best for the economy.
The December rebound in inflation supported analysts who are predicting that rates wouldn’t start to come down until June.
Carsten Brzeski, chief eurozone economist at ING bank, said a jump in inflation to 3.8% from 2.3% in Germany, Europe’s largest economy, “strengthens the stance of keeping a very steady hand and not rushing into any rate cut decisions.”
Officials at the U.S. Federal Reserve also stressed the importance of keep rates high until inflation is “clearly moving down,” according to minutes of their Dec. 12-13 meeting released Wednesday. The Fed has signaled three rate cuts this year.
U.S. consumer prices were up 3.1% in November from a year earlier.
Higher interest rates are the typical central bank tool against inflation. They raise the cost of borrowing for consumer purchases, particularly of houses and apartments, and for business investment in new offices and factories.
That lowers demand for goods and relieves pressure on prices — but it also can limit growth at a time when it’s in short supply in Europe. The economy shrank 0.1% in the July-to-September quarter.
Inflation itself, however, has been a key challenge to economic growth because it robs consumers of purchasing power. The ECB — like other central banks around the world — said raising rates quickly was the best way to get it under control and avoid even more drastic measures later.
The December inflation figure was boosted by the end of energy subsidies in Germany and France that had lowered prices a year ago.
Core inflation, which excludes volatile fuel and food prices, eased to 3.4% from 3.6% in November, according to European Union statistics agency Eurostat. The figure is closely watched by the ECB.
Inflation spiked in Europe as the rebound from the COVID-19 pandemic strained supplies of parts and raw materials, then as Russia invaded Ukraine in February 2022, raising costs for food and energy.
Europe has since found other supplies of natural gas outside Russia to generate electricity, power factories and heat homes, so energy prices have eased.
Europe — and the rest of the world — is facing a possibility of new delays and higher prices for consumer products as attacks by Yemen's Houthi rebels have scared away the world's largest container shipping companies and energy giant BP from sailing through the Red Sea and Suez Canal.
