A sharp drop in inflation is a relief to Europe’s governments, which have been under intense political pressure as rising prices pinched their populations.
The primary cause was the slump in energy prices, which fell to their lowest in nearly a year as record warm winter temperatures reduced demand and kept stored gas abundant. It underlines that the primary driver of inflation was the deep disruption to Europe’s long misguided reliance on Russia for cheap gas, upended by Moscow’s decision to invade Ukraine. The Baltic states have felt the brunt of the result, with inflation rates double Ireland’s at around 20 per cent.
There are some hopes that inflation has now peaked. But this depends on whether expectations and policy choices to pump money into the economy to help households with crushing energy bills lock further inflation in.
It also depends how the summer refilling season goes. Prices peaked last August as nervous buyers like Germany engaged in a bidding war to ensure they had sufficient reserves of the gas their industry relies on to avoid winter blackouts. To avoid a repeat European Union member states are making plans for vaccine-style joint energy purchases, along with wholesale market reforms to add to interventions agreed last year that seem to have been effective in cooling markets.
Yet supply will remain an underlying problem, with no shortage of competition for Norwegian and North Sea supplies and liquid natural gas from the United States.
The drop in inflation may also not be enough to dissuade the European Central Bank from future economy-dampening rate hikes. That’s because core inflation, which strips out volatile food and energy, nudged upwards to 5.2 per cent from 5 per cent the previous month, a bellweather for future trends that indicates the effects of the inflationary surge are still working through the economy.
