Eurozone inflation rises as politicians weigh an interest rate hike

Why it matters: The goal is to control inflation while preventing a recession.

The International Monetary Fund recently said that taming inflation while avoiding a recession was Europe’s biggest challenge in the coming months, as the continent continues to digest the impact of the war in Ukraine on its economy.

So far, the European Central Bank’s campaign to raise interest rates has helped drive overall inflation down from a peak of 10.6 percent in October last year. The Eurozone has avoided a recession, but economic growth remains modest.

Lending data released on Tuesday by the central bank showed demand for consumer credit weakened, as banks made it harder for borrowers to receive credit and high interest rates to borrow caused demand to fall, further cooling the economy.

But politicians warn that they are looking for indications that prices will fall in the long term.

“We need to see a sustained decline in core inflation that gives us confidence that our policy is starting to work,” Isabel Schnabel, a member of the central bank’s executive board, said in an interview with Politico last week.

Country by country: Prices remained high in the Baltics, but fell in Germany.

Baltic countries and Slovakia had double-digit price increases, as high as 15 percent for Latvia. Some of the larger European economies with lower rates are dealing with pressure from workers seeking wage increases to keep up with rising living costs.

The diverging rates also reflect domestic measures that governments have introduced to limit energy prices. As the summer holiday season picks up, countries with strong tourism markets are also poised to see the impact of rising service prices.

In Germany, Europe’s largest economy, the annual inflation rate fell to 7.6 percent from 7.8 percent in March. Food prices remained stubbornly high, while government interventions to tame energy costs began to take hold.

Workers in Germany’s public sector secured an agreement to give 2.5 million employees a 5.5 percent pay rise next year. That pact is expected to set a precedent for other wage talks and could threaten the European Central Bank’s forecast that wage growth in the eurozone will peak this year.

In France, which has been plagued for months by waves of strikes over the government’s decision to raise the retirement age, inflation rose to 6.9 percent in April from 6.7 percent in March, driven mainly by energy, and the prices of services also rose slightly.

In Spain, prices rose to 3.8 percent in April from 3.1 percent the previous month as food costs rose, although energy prices that had risen to record levels last year continued to fall.

What’s next: A decision from the European Central Bank.

The inflation data will influence the European Central Bank’s decision on whether to continue raising interest rates in an attempt to bring down inflation. The bank’s governing council meets on Thursday, and most analysts estimate it will vote to raise interest rates by either a quarter or half a percent.

The bank raised its deposit rate to 3 percent last month, the highest since October 2008, as it seeks to cool demand and bring inflation closer to its 2 percent target.

“Although headline inflation has declined and will decline further, this is not yet the moment of relief,” said Carsten Brzeski, chief economist at ING Germany. “The ECB does not want to repeat the previous mistake of underestimating inflation and will therefore be willing to go too far, even if this ultimately turns out to be a policy mistake.”