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Tuesday, January 23, 2024
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Eurozone core inflation delayed suddenly in April, confusing the picture for rate strolls

May 3, 2023: According to preliminary data released Tuesday, the headline inflation rate in the eurozone rose in April, remaining hugely above levels targeted by the European Central Bank. Still, core price growth showed a surprise slowing.

Eurostat stated that headline inflation peaked at 7% last month after it decreased to 6.9% in March. At the same time, core inflation, which does not include food and energy costs, stood at 5.6% in April from 5.7% in March.

The recent figures come just days before the ECB announces Thursday’s new monetary policy decision. Rather than clarifying how much the central bank might raise rates, the latest numbers have blurred the picture.

Market people have debated whether the central bank will increase by 50 or 25 basis points on Thursday. On the one hand, the increase in headline inflation could push hawkish people of the ECB to argue for another 0.5 percentage point surge. On the other hand, the sudden slowdown in core price growth could tilt to manage toward a more dovish stance and outcome in a compromise rate hike of 25 basis points.

According to preliminary figures out Friday, the eurozone economy grew by 0.1% in the initial quarter. This was below market expectations.

The central bank embarked on its present hiking path in July 2022, bringing its primary rate from -0.5% to zero. The ECB’s introductory rate is currently at 3%.

Despite the consistent price increases, inflation remains above the ECB’s aim of 2%. In this previous week, Estimates published by the International Monetary Fund stated that headline inflation will not come close to the ECB’s aim until 2025.

“Further drawing is required, and when the terminal rate has been reached, terminal prices need to be maintained for longer due to the high core inflation and very persistent. And there’s nothing worse than waiting for an inflation-struggling effort too early or abandoning it too early, if you need to do it a next time, the costs to the are so much higher,” Alfred Kammer, director of the European Department at the IMF, told on Friday.

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