European Central Bank set to announce another interest rate increase to combat inflation

The inflation rate in the eurozone inched higher last month, extending the squeeze on households and keeping pressure on the European Central Bank (ECB) to announce another large interest rate increase.

Consumer prices in the 20 countries using the euro currency - including Ireland - jumped 7% in April from a year earlier, just down from the annual rate of 6.9% in March, the European Union statistics agency Eurostat said on Tuesday.

Food prices eased a little, falling to an annual 13.6% from March’s 15.5%, while energy prices rose a more modest 2.5%.

Core inflation, which excludes volatile food and fuel, slowed slightly but was still high at 5.6%, underlining the expectation that the ECB will press ahead with its campaign to beat inflation into submission with rate hikes.

Analysts say the ECB’s meeting on Thursday in Frankfurt could end in an increase of a quarter or a half-percentage point. 

A quarter-point hike would be a moderation in the bank’s series of rapid increases while a half-point would underline concern that inflation is still not heading back toward the bank’s goal of 2% considered best for the economy.

While the slight fall in food inflation is good news, economists say those are partly statistical quirks, due the fact that lower figures from before the current outbreak of inflation have aged out of the annual comparison, a so-called base effect.

Of more concern is core inflation, considered a better measure of price pressures in the economy from demand for goods and higher wages.

This bout of inflation was initially spurred by high energy prices tied to Russia’s invasion of Ukraine. Moscow cut off most of its natural gas supplies to Europe and there were fears the war would take large amounts of oil off the market.

Rebounding demand after the worst of the Covid-19 pandemic and problems with supplies of parts and raw materials also played a role.

But since then, the factors driving inflation have spread from energy to food, and workers have begun demanding higher wages to compensate for their diminished spending power.

Economists at UniCredit and Deutsche Bank said a quarter-point hike by the ECB was more likely.

Rate increases are central banks’ chief tool against inflation. Higher rates increase the cost of credit for consumer spending or business investment, and thus cool off the demand for goods.

But the rapid course of monetary tightening by both the ECB and the US Federal Reserve have raised concerns about the impact on economic growth.

The US is still stalked by fears of a recession, while the European economy barely scraped out growth in the first three months of the year with a meagre 0.1% rise in output.