June 6, 2023

Dubai Week

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Inflation is falling in the euro area

Berlin: European Central Bank President Christine Lagarde announced on Friday that inflation in the eurozone will pick up in the coming months thanks to lower energy prices and higher interest rates, while warning that these expectations are shrouded in “great uncertainty”.

“We expect inflation in the euro area to continue to decline (… .) However, these expectations are still surrounded by a great deal of uncertainty,” Lagarde said in a speech during the spring meetings of the International Monetary Fund and the World Bank, according to material posted on the European Central Bank’s website.

After rising strongly last year due to higher energy prices and the post-coronavirus recovery, inflation in the eurozone has eased since the recession, calm in energy markets and eased supply tensions.

Lagarde said the trend is “continuing downward pressures on prices and tightening monetary policy, further curbing demand.”

He added that “historic wage growth” coupled with a low unemployment rate and “inflation compensation” will “support inflation”.

He explained that the ECB is cautious about its outlook because there are “many upside and downside risks”.

“More pressures on supply chains or larger-than-expected increases in wages or profits can lead to higher inflation,” he said.

Price rise
While energy prices have fallen, food prices “continue to rise,” the official said.

Instead, Lagarde says, “Tensions in financial markets and lower energy prices could lead to a faster decline in inflation.”

He noted that the same caveat applies to economic activity.

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Prospects for recovery remain weak amid continued uncertainty.

High inflation
Despite five straight months of declines, inflation in the euro zone remained at an all-time high of 6.9 percent in March. The ECB does not expect to return to its medium-term target of 2% until 2025.

To combat inflation, the financial institution has raised key interest rates by 3.5 percentage points since July and does not intend to stop.