Inflation rose in Europe in May, but its central bank is still set to cut interest rates before the Federal Reserve

Inflation rose to 2.6% annually in Europe in May, according to official figures on Friday. This is more than expected, as the painful rise in consumer prices takes time to fade.

However, that is unlikely to stop the European Central Bank from making a first interest rate cut next week and getting ahead of the US Federal Reserve in reducing borrowing costs for businesses and consumers.

The official figure for the 20 countries that use the euro compares with 2.4% in April, according to the European Union’s statistics agency, Eurostat. Markets were expecting 2.5% for May.

The ECB would be ahead of the US Federal Reserve, which has refrained from cutting rates due to more persistent inflation in the United States. That would be a change from the hiking cycle, when the ECB lagged the Federal Reserve in raising rates as inflation exploded in the world’s developed economies. US consumer inflation reached a seasonally unadjusted annual rate of 3.4% in April.

In this case, the ECB faces a different economic situation, as it was hit harder by a rise in energy prices, which has now dissipated. Inflation in the United States has been fueled by higher stimulus spending during and after the coronavirus pandemic and stronger growth, putting the Federal Reserve in a different situation.

Inflation soared to double digits in Europe after Russia cut off most pipeline natural gas supplies due to its large-scale invasion of Ukraine, and as the pandemic recovery clogged supply chains for spare parts and raw materials. cousins. Inflation has fallen, as energy prices have fallen and supply bottlenecks have eased.

The fall in inflation has slowed in recent months as workers have pushed for higher wage deals to offset the loss of purchasing power. That has led to stubbornly higher prices in the services sector, a broad category that includes everything from hotel rooms to health care to concert tickets, and where salaries account for much of the cost of doing business. Utility prices rose 4.1% in May, even as energy prices rose just 0.3% and food inflation did not rise above the headline figure of 2.6%.

As inflation has moved closer to the ECB’s target of 2%, concerns about growth have become more prominent. The eurozone has not shown a significant increase in gross domestic product in four years. While higher rates combat inflation by making it more expensive to borrow and buy things, they can also hurt growth.

ECB officials have made clear that a rate cut from the current all-time high of 4% is on the table when the bank’s rate council meets in Frankfurt. Bank President Christine Lagarde said last week that she was “really confident” that inflation was under control.

Philip Lane, a member of the six-person executive board that runs the bank day-to-day at its Frankfurt headquarters, was quoted by the Financial Times as saying officials were “ready to remove the top layer of restriction” on borrowing costs. . Lane is the official who prepares monetary policy decisions for the 26-member governing council that sets benchmark rates, whose other members are the heads of the national central banks of eurozone countries.

It remains to be seen how quickly the bank will reduce rates at subsequent meetings. Recent better growth indicators for Europe, as well as persistent inflation and stronger wage growth “could be arguments against a rate cut next week,” said Carsten Brzeski, global head of macro at ING bank.

“However, the ECB’s own communication over the past two months has made it almost impossible not to cut,” Brzeski said. That means the bank could act “very gradually” after the June meeting to reduce rates while keeping them at a level that restrains credit, growth and inflation.

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