Central banks don’t want to find inflation is more stubborn than they thought and reverse course.
| Photo Credit: REUTERS
Inflation in the 20-nation eurozone crept lower to 2.5% in June, but remained stuck above the level favored by the European Central Bank (ECB), which is in no hurry to add more rate cuts after a first tentative reduction in its benchmark rate.
The figure released Tuesday was down from 2.6% in May, welcome news as inflation continues to fall from its peak of 10.6% that robbed consumers of spending power and mired the European economy in months of near-zero growth.
But key indicators Tuesday remained at levels that suggest inflation may remain stuck between 2% and 3% for a while yet. Inflation in services prices ran at 4.1%, unchanged from the month before.
The ECB’s caution in making sure inflation is under control comes as the U.S. Federal Reserve holds off on cutting rates from current highs. The central banks don’t want to belatedly discover that inflation is more stubborn than they thought and reverse course — a mistake that would make inflation harder to wring out of the economy and would ding their credibility into the bargain.
High rates aim to squelch inflation by making it more expensive to borrow money to buy goods or invest in new factory equipment. That relieves pressure on prices — but can also dampen growth. That’s the tightrope the ECB and the Fed are trying to walk: make sure inflation is contained, without pushing their economies into recession.
ECB President Christine Lagarde said the bank needed to make sure inflation was firmly under control before cutting its key rate again after a first, quarter-point cut on June 6 to the current 3.75%.
