Europe fights inflation even as energy costs drop

As the European Union makes headway on energy, inflation in the food and services industries offsets any real economic progress.

In April, Europe’s inflation rate increased from 1.2% to 1.4%. Sure, that may not sound like much, but when you consider how many transactions the average consumer makes on a daily basis (fill up the gas tank, coffee break, lunch, etc.) – it adds up. The inflation rate has been under the European Central Bank’s 2% cap since February, and as long as it stays there, economists don’t foresee any catastrophes on the horizon.

However, with Europe stuck in an 18-month long recession, politicians are seeking ways to boost economic growth. President Mario Draghi has already said he’s willing to reduce lending rates if the economy continues to deteriorate. That would allow more small business to open, and hopefully stimulate consumer spending.

Janet Henry, primary economic adviser at HSBC Holdings, has hope for the future. “As long as the European Central Bank’s baseline scenario of some recovery in the second half of the year remains in place, I would be very surprised if they cut rates again over the next couple of months,” she says. “They need to see a further deterioration from where we are currently rather than the stabilization they expect to see around the middle of the year.”

The recession is expected to come to an end in Europe’s second quarter. According to a survey performed by Bloomberg, their economy should see a return to growth in as little as three months.

However, as the price of energy drops (0.2 % this month after a 0.4% drop in April), food, alcohol, and tobacco prices are on the RISE - 3.3% to be exact. The service industry has suffered from inflation as well. They saw an increase of 1.4% compared to last month.

So although Europeans may be paying a fraction of a penny less for energy, they’re making up for it at the market. Unless you expect people to give up drinking beer, smoking cigarettes, and gorging on junk food, which is even less likely than an immediate solution to the climate crisis.

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