European Central Bank set to raise interest rates after inflation edges higher

The inflation rate in the eurozone inched higher last month, extending the squeeze on households and keeping pressure on the European Central Bank (ECB) to announce another large interest rate increase.

Consumer prices across the 20 eurozone countries jumped 7 per cent in April from a year earlier, just down from the annual rate of 6.9 per cent in March, Eurostat said on Tuesday.

Food prices eased a little, falling to an annual 13.6 per cent from March’s 15.5 per cent, while energy prices rose a more modest 2.5 per cent.

Core inflation, which excludes volatile food and fuel, slowed slightly but was still high at 5.6 per cent, underlining the expectation that the ECB will press ahead with its campaign to beat inflation into submission with rate hikes.

Analysts say the ECB’s meeting on Thursday in Frankfurt could end in an increase of a quarter or a half-percentage point.


A customer pays for fish at the Maravillas market in Madrid as households continue to see high inflation in food prices (Manu Fernandez/AP)

A quarter-point hike would be a moderation in the bank’s series of rapid increases while a half-point would underline concern that inflation is still not heading back towards the bank’s goal of 2 per cent considered best for the economy.

While the slight fall in food inflation is good news, economists say those are partly statistical quirks, due the fact that lower figures from before the current outbreak of inflation have aged out of the annual comparison, a so-called base effect.

Of more concern is core inflation, considered a better measure of price pressures in the economy from demand for goods and higher wages.

This bout of inflation was initially spurred by high energy prices tied to Russia’s invasion of Ukraine. Moscow cut off most of its natural gas supplies to Europe and there were fears the war would take large amounts of oil off the market.

Rebounding demand after the worst of the Covid-19 pandemic and problems with supplies of parts and raw materials also played a role.

But since then, the factors driving inflation have spread from energy to food, and workers have begun demanding higher wages to compensate for their diminished spending power.

Economists at UniCredit and Deutsche Bank said a quarter-point hike by the ECB was more likely.


Rate increases are central banks’ chief tool against inflation. Higher rates increase the cost of credit for consumer spending or business investment, and thus cool off the demand for goods.

But the rapid course of monetary tightening by both the ECB and the US Federal Reserve have raised concerns about the impact on economic growth.

The US is still stalked by fears of a recession, while the European economy barely scraped out growth in the first three months of the year with a meagre 0.1 per cent rise in output.

Analysts say the Fed could raise rates by a quarter-point on Wednesday.