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Inflation rates continued to decline in most European countries last month. Consumer prices in the 20 countries that use the euro as their currency rose at an annual rate of 2.6% in February, slowing from 2.8% in January, the European Commission’s statistics office said on Friday.
Why it matters: Interest rates won’t fall until inflation occurs.
The faster inflation falls closer to the European Central Bank’s 2% target, the sooner the bank may be inclined to lower interest rates, currently at 4%. Central Bank President Christine Lagarde said she expected inflation to continue to slow, given that energy prices have fallen significantly from the nosebleed levels reached in 2022. The easing of supply chain blockades is also dampening inflationary pressures.
Still, central bank policymakers remain cautious about when to ease efforts to fight inflation. Lagarde told a meeting of the European Parliament this week that demands for higher wages are strong and could lead to higher prices. “Wage growth is expected to be an increasingly important driver of inflation trends in coming quarters,” he said.
The bank also pays close attention to core inflation, which removes volatile food and energy prices. This annual figure fell from 3.3 percent to 3.1 percent, but is still significantly higher than the headline number. Consumer prices for some goods and services continue to rise.
A meeting of central bank governors is scheduled for next week, but most analysts don’t expect interest rates to fall until mid-year.
The Numbers: Country Scorecards.
Europe’s two largest economies, Germany and France, both reported lower consumer prices. Germany’s annual rate fell to 2.7% in February from 3.1% the previous month. In France, the rate fell from 3.4% to 3.1%, the lowest level in two and a half years. In Spain, the annual rate fell to 2.9% from 3.5% in January.
Italy and Latvia had the lowest inflation rates, below 1%. Austria, Croatia and Estonia were at the top with percentages above 4%.
Bottom line: It’s all about energy prices.
“This is still primarily an energy-based story,” said Carsten Brzeski, an economist at Dutch bank ING, of the price decline since last year. “If you look at it from a year-over-year inflation perspective, you see oil, gas and electricity prices going down.”
