Euro zone inflation edges down as ECB ponders imminent rate rise decision

Euro zone core inflation has edged down, compounding the dilemma for the European Central Bank (ECB) over whether to continue the biggest set of interest rate rises since the creation of the single currency.

The EU’s statistical office said on Thursday that overall inflation for the region was unchanged at 5.3 per cent in the year to August, but noted that prices excluding energy and food cooled.

The figures come ahead of the ECB’s September 14th meeting, when it faces one of its most finely balanced decisions in years: whether to risk pushing the euro zone economy into a painful recession by raising rates further, or allow inflation to become entrenched far above its 2 per cent target.

The US Federal Reserve is also grappling with the same rate rise dilemma as its preferred measure of underlying inflation posted the smallest back-to-back increases since late 2020, encouraging a burst of consumer spending and feeding growing expectations that the economy can avert a recession.

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However, the central bank is far from declaring victory, and the strength of consumer spending presents a fresh concern for policymakers seeking to ensure inflation continues to dissipate.

ECB policymakers kept a September rate hike on the table when they raised interest rates in July, although some of them argued that another move would be deemed unnecessary when new economic projections were released, the minutes of the meeting showed on Thursday.

The ECB has lifted rates from minus 0.5 per cent to 3.75 per cent in just over a year to fight a surge in inflation. Arguments for a pause are now on the rise, especially as economic growth is visibly slowing, underperforming the ECB’s already benign expectations.

“A further rate hike in September would be necessary if there was no convincing evidence that the effect of the cumulative tightening was strong enough to bring underlying inflation down,” the accounts of the July 26th-27th meeting showed.

August inflation data on Thursday showed underlying price growth easing to 5.3 per cent from 5.5 per cent a modest decrease that is still likely to add to arguments that price pressures are waning.

The accounts acknowledged that underlying inflation could be expected to remain high for an extended period, even if growth was slowing. - The Financial Times/Reuters/Bloomberg