European inflation eases for 3rd month but prices still bite

LONDON — Europe’s inflation rate dipped at the start of the year, giving some relief to consumers but still leaving them facing higher prices that have driven protests and will likely press the European Central Bank into another interest rate hike Thursday.

The consumer price index for the 20 countries that use the euro currency reached 8.5% in January compared with a year earlier, European Union statistics agency Eurostat said today. That’s down from the annual rate of 9.2% in December.

It’s the first report on consumer prices that includes data from Croatia, which joined the eurozone on Jan. 1, but lacked unavailable figures from Germany, Europe’s biggest economy. Inflation in Europe has now slowed for the third month in a row, falling from a record high of 10.6% in October.

Food and energy prices are persisting as the major factors driving up European inflation. Prices for food, alcohol and tobacco rose at a 14.1% annual pace in January, while energy prices rose 17.2%.

Russia’s war in Ukraine has shaken up food and energy markets, and while commodity prices have fallen from all-time highs last year, consumers are not yet seeing relief on their utility and grocery bills.

Natural gas prices have dropped from records last summer thanks to a scramble to find supplies outside Russia and warmer winter weather that eased energy demand for heating. While Europe may have dodged fears of energy rationing and shortages after Russia cut off most supplies, natural gas prices are still three times higher than before Russia started massing troops on Ukraine’s border.

The energy upheaval has made the cost-of-living squeeze more painful in continental Europe and the United Kingdom than in the U.S., leading to protests and strikes from workers in several countries seeking pay that keeps pace with inflation.

U.S. annual inflation dropped to 6.5% in December, while the U.K. reading of 10.5% signaled how the British economy was a striking exception to the International Monetary Fund’s brighter outlook for 2023.

In the eurozone, so-called core inflation, which doesn’t include volatile food and energy costs, held steady at 5.2% last month, underlining how prices also are rising for both services and goods such as clothing, appliances, cars and computers.

Germany’s inflation number wasn’t available because of a technical issue so an estimate was used. Economists said that means the inflation figure should be taken with a pinch of salt.

Still, “when it comes to monetary policy, this is just noise,” Jack Allen-Reynolds of Capital Economics said in a report. “The core inflation rate is sending a clear signal: underlying price pressures remain strong.”

With inflation far above its target of 2%, the ECB has been raising interest rates that make it more expensive for consumers to borrow money. Aiming to get price spikes under control, the central bank is expected to institute another half-point hike Thursday.

That will come a day after a decision by the U.S. Federal Reserve and the same day the Bank of England acts on borrowing costs.

The central bank moves to cool inflation also strain the economy, with Europe eking out just 0.1% growth in the final three months of last year and 3.5% for all of 2022. That outpaced the 2.1% expansion in the U.S. and China’s 3% growth last year.