Inflation in the eurozone has eased for the first time in more than a year, as fuel and utilities drifted down from painful highs, but the double-digit rate still hovers near a record that has robbed consumers of their spending power and led economists to predict a recession.
The consumer price index in the 19 countries that use the euro currency was down to 10% in November from 10.6% in October, the European Union statistics agency Eurostat said Wednesday. It marks the first decrease since June 2021.
The November reading raises hopes that sky-high price growth is now past its peak and bolstering, if not outright sealing the case for a slowdown in European Central Bank (ECB) rate hikes next month.
The overall picture is more nuanced, however, as energy prices accounted for the bulk of the slowdown while food price inflation, a key worry, continued to accelerate, the data showed.
Energy prices slipped to a 34.9% rate of increase, down from the astronomical 41.5% in October.
Out-of-control inflation is being fed by high energy prices caused by Russia cutting off natural gas over the war in Ukraine as well as bottlenecks in supplies of raw materials and parts and rebounding demand after the removal of COVID-19 pandemic restrictions.
Inflation has hit other economies but has taken a particularly high toll in Europe because of its dependence on Russian natural gas, which exporter Gazprom has reduced to a trickle. European leaders say it's energy warfare due to the continent's support for Ukraine.
With inflation running at more than five times its 2% target, the ECB has raised interest rates at its fastest pace on record this year and a string of hikes over the coming months is still likely as price growth will take years to tame.
But some policymakers have recently made the case for a 50-basis-point rise on Dec. 15 after back-to-back 75-basis-point moves, arguing that inflation is finally peaking and that the ECB has made enough progress to justify more modest steps.
"While we're far from out of the woods yet, it does look like the current economic environment could push the European Central Bank to a smaller 50 bp hike next month," ING economist Bert Colijn said.
Market bets, which had been split between moves of 50 and 75 basis points, moved sharply on Wednesday's data and investors now see a 50 basis point move as the most likely outcome for December.
Risks persist
While the dip in headline prices, the eurozone's first in well over a year, strengthens the case for more measured ECB action next month, Wednesday's data could also fuel fears that inflation will prove more persistent than expected.
ECB President Christine Lagarde said Monday that she does not believe inflation has peaked after reaching record levels and that the bank isn’t through raising interest rates to combat those price spikes.
When looking at what is driving inflation, "whether it is food and commodities at large, or whether it is energy, we do not see the components or the direction that would lead me to believe that we have reached peak inflation and that it is going to decline in short order," Lagarde told European lawmakers.
That means the central bank will "continue to tame inflation with all the tools that we have," primarily interest rate hikes, Lagarde said.
Underlying price growth, excluding volatile food and energy prices, remained high, which is likely to trigger warnings from conservative central bankers, while food price growth, a key concern for governments, shows little sign of peaking.
Filtering out food and fuel costs, inflation rose to 6.6% from 6.4%, defying expectations for a drop, while an even more narrow measure that also excludes alcohol and tobacco held steady at 5%.
Inflation for processed food, alcohol and tobacco, a key category, meanwhile accelerated to 13.6% from 12.4%.
"This does not mean that the battle against inflation has been won," Commerzbank economist Christoph Weil said. "The underlying upward pressure on prices is unlikely to abate."
"The core inflation rate is unlikely to peak until mid-2023 and will only fall slowly thereafter."
Another complication is that economic growth is not flagging as much as some had anticipated, meaning that the deflationary impact of a looming winter recession is likely to be more modest than once thought.
Initially fuelled by global supply bottlenecks as economies reopened after pandemic, inflation has been driven this year by energy costs which surged after Russia invaded Ukraine and soaring food prices related to the war and poor harvests.
Inflation could still edge back up in the coming months, especially at the turn of the year when energy contracts get repriced, but it is likely to decline through 2023 and return to the vicinity of 2% by the end of 2024.
Such a rapid decline lacks historical precedence, some policymakers warn, suggesting that today's small decline is unlikely to be a game-changer for where rates end up over the cycle of monetary tightening.