Europe's inflation slows but cost of living still high

Europe ended a bad year for inflation with some relief as price gains eased again. While the cost of living is still painfully high, the slowdown is a sign that the worst might be over for weary consumers.

The consumer price index for the 19 countries that used the euro currency rose 9.2 per cent in December from a year earlier, the slowest pace since August, the European Union statistics agency Eurostat said Friday. Croatia joined the eurozone on Jan 1.

It was the second straight decline in inflation since June 2021. In November, the rate dipped to 10.1 per cent after peaking at a record 10.6 per cent in the previous month, reports AP.

Households and businesses across Europe have been plagued by surging energy costs since Russia launched its war in Ukraine in February, which played havoc with oil and natural gas markets and have been the main driver of inflation.

The latest numbers indicate that the energy crisis may be easing for now. Energy price rises slowed to 25.7 per cent, down from 34.9 per cent in November and 41.5 per cent in October.

Natural gas prices have slipped from all-time highs this summer as Europe has largely filled its storage for winter with supplies from other countries while warmer-than-usual weather has reduced fears of a shortage during the heating season.

Food price gains, the other big factor that's been driving up European inflation, held fairly steady. Prices for food, alcohol and tobacco rose at a 13.8 per cent annual pace in December, a smidgen higher than the month before.

Inflation also has been worsened by bottlenecks in supplies of raw materials and parts amid rebounding global consumer demand after Covid-19 pandemic restrictions ended.

"It is likely that the peak in inflation is behind us now, but far more relevant for the economy and policymakers is whether inflation will structurally trend back to 2.0 per cent from here on," said Bert Colijn, senior eurozone economist at ING Bank.

So-called core inflation, which excludes volatile food and energy costs, climbed to 5.2 per cent last month from November's 5.0 per cent, as prices rose for both services and goods such as clothing, appliances, cars and computers. Colijn and other economists said that means European Central Bank officials will likely roll out more interest rate hikes to get inflation back to their 2.0 per cent target.

Soaring costs for energy and food have threatened a recession and fed labour unrest as wages fail to keep pace with the price rises. Across Europe, subway staff, hospital workers, train drivers, postal workers and air traffic controllers have gone on strike, threatening political turmoil.

In a sign that energy costs remain a worry for political leaders, French President Emmanuel Macron on Thursday urged energy suppliers to renegotiate what he called "abusive contracts" with small businesses to ensure "reasonable" price hikes.

Macron spoke to bakers gathered at the presidential palace for a traditional Epiphany kings cake ceremony, underscoring how energy and food prices are intertwined.

"Like you, I've had enough of people making excessive profits on the crisis," he said.

The French government has capped natural gas and electricity price hikes to 15 per cent this year for consumers and some very small companies that don't use much energy. But more energy-intensive businesses, like bakeries, aren't covered, leaving some of them facing closure because they can't pay their bills.

While governments have offered relief on high energy bills, central banks are battling inflation by hiking interest rates.

Last month, the European Central Bank raised its benchmark rate by half a point, slowing its record pace of interest rate increases slightly but promising that more hikes are on the way. It matched actions taken by counterparts in the U.S., United Kingdom and elsewhere.

"The eurozone economy is at best stagnating, and persistently strong core inflation means the ECB will feel duty bound to press on with its tightening cycle for a while yet," said Andrew Kenningham, chief Europe economist for Capital Economics.