Eurozone inflation falls again, ‘but it is rumbling under the hood’

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Inflation in the eurozone is falling for the fifth month in a row. Last month, prices rose by 6.9 percent compared to a year earlier. This is evident from the final inflation figures from Eurostat. ‘Good news’, says economist Edin Mujagić, ‘but if you look under the hood you can see that things are going wrong.’

Apart from Luxembourg and Spain, the Netherlands has the lowest inflation rate, namely 4.5 percent, in the eurozone. (Sara Kurfess on Unsplash)

Not windy yet

According to Mujagić, there are two problems under the European engine head. First of all, core inflation – inflation excluding food and energy prices – rose slightly from 5.6 to 5.7 percent. ‘That indicates that it is more persistent,’ says Mujagić.

The fact that core inflation has risen slightly and regular inflation has fallen is due to the sharp fall in energy prices since the end of last year. ‘And in addition, services inflation is perhaps the most stubborn,’ continues Mujagić. In March, the average price increase of services was 5.1 percent, compared to 4.8 percent in the previous month.

‘We call that plateauing at a much too high level’

Edin Mujagic, economist

The European Central Bank (ECB) wants to bring inflation in the eurozone back to around 2 percent, but according to Mujagić that will not be possible this year. “The combination of these two problems, services inflation and core inflation, means that there is a good chance that inflation will not return to the level that the ECB wants to see. We call that plateauing at a much too high level.’

The ECB currently uses an interest rate of 3.50 percent, but that can rise further to 3.75 percent. ‘That does make a difference’, says Mujagić, ‘but with inflation rates like this and the prospect that inflation will remain high for a very long time, you really need higher interest rates.’

A bright spot for the Netherlands

Yet there is also a bright spot in the Eurostat figures. Together with Spain and Luxembourg, the Netherlands has the lowest inflation rate in the eurozone. ‘That is welcome news, because last year we were in the top five highest inflation rates. Now we stand out favorably for once’, says Mujagić. ‘But then again, the fact that you are a bit jubilant here about 4.5 percent inflation does show how the perception has changed. 4.5 is and remains far too much.

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