Inflation in Europe continues to rise
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In April, inflation raised again in virtually the entire Eurozone, reaching 7%, a slight increase from 6.9% in March. This can be read in the publication of the monthly report of Eurostat, the statistical office of the European Union under the direction of the European Commission. This figure is particularly important as it is the first rise in inflation since the decline that started last November from the record levels reached in 2022. Inflation figures have become relevant again as, after decades of very low inflation, sometimes even negative, as at the beginning of 2015, inflation in the EU has been rising very fast since January 2021, reaching a peak of 11.5% in October 2022. In April 2023, according to data collected and disseminated by the European statistics office, food, tobacco and alcohol remained the main component driving the inflation trend, although the price increase in the sector dropped to 13.6 % from 15.5 % in March. Non-energy industrial goods followed at 6.2 per cent, compared to 6.6 per cent in March, then services at 5.2 per cent, compared to 5.1 per cent in March.
On the other hand, energy prices rose again, reversing the trend. In April, energy prices rose compared to the previous period by 2.5% compared to -0.9% in the previous month. The question that almost automatically comes to mind is therefore what is this rise in inflation due. The causes are many, but almost all have to do with the pandemic and the war in Ukraine. On the one hand, with the progressive post-lockdown reopening, people started going out, travelling and spending money again. This caused a sudden increase in demand that found global companies and supply chains unprepared. On the other hand, the Russian invasion of Ukraine and the resulting sanctions by Western countries have imposed severe limits on the import of Russian oil and gas, the shortage of which has caused gasoline and energy prices to rise
The scenario in question therefore seems far from reassuring; the inflationary picture in question seems really worrying not only for observers and analysts but also for the ECB. Indeed, the European Central Bank has decided, given the concerns, to hold Governing Council meetings with the aim of raising interest rates. So once again the two coexisting lines within the Governing Council will confront each other, the first the rigorist one calling for a tightening of 50 basis points, against the one calling for an increase of only 25 points. What now seems certain, unfortunately, given the rise in general inflation, is that the European Central Bank’s strategy has not worked. The European Central Bank’s strategy has been to fight inflation by raising rates, but after a positive first few months; inflation has risen again, as Eurostat has pointed out. In fact, in recent years, the European Central Bank, in an attempt to curb the excessively high price level, which let us recall has an inflation target of close to 2%, has begun to raise interest rates and since July 2022 has gradually raised principal interest rates at every Board meeting, raising the main refinancing rate from 0.5% to 3.5% on March 22, 2023 to 3.75% on May 4, 2023. This is the seventh consecutive rise in 10 months a dynamic never seen since the European single currency has existed.
From May 10, 2023 , therefore, in the euro zone main refinancing operations will be raised to 3.75 %, marginal refinancing operations to 4.00% while those on deposits with the ECB to 3.25%. The president of the European Central Bank, Christine Lagarde, thus stated that they are aware of the problems those who have taken out mortgages and loans are having and how households are suffering because of the rate hikes and repayments that have become increasingly onerous. Christine Lagarde also added that unfortunately it is not something they can alleviate because their job is to stabilize prices and to reduce inflation they can only use the tool of rates. In addition to this, starting a few years ago, in July 2021 to be more precise, the ECB had also announced a slight but significant change in monetary policy strategy. The 2% target had always been seen as a ceiling, a maximum threshold to be skimmed over but not touched, and this has probably contributed in the past to anchoring markets’ inflation expectations below 2%. For this reason, in July 2021, the ECB Board implemented average inflation targeting, stipulating that the 2% target was to be regarded as a medium-term goal and thus considering both negative and positive variances equally undesirable.
The third line of action involved reducing the asset purchase program.
The famous, i.e., the previous Quantitative Easing (QE) that aimed to support liquidity with the goal of getting out of stagnation and deflation; now, however, the new Quantitative Tightening (QT) program has the opposite goal: the reduction of government bond purchases to raise long-term interest rates and curb inflation. In conclusion, as stated by Dr. Isabel Schnabel, one of the members of the Executive Board of the ECB, given the persistence of inflation the dilemma of the European Central Bank is that on the one hand it will have to raise rates to curb inflation, and on the other hand it will have to avoid vulnerable situations on government debts, and this will be really very complex and difficult to solve.
By Michele Brunori
