European inflation eases slightly, consumer pain from higher costs persists

Inflation eased only slightly in the 20 countries that use the euro currency as the pain from higher costs for food and fuel persists and gives the European Central Bank no reason to slow interest rate increases aimed at getting prices back under control.

The consumer price index reached 8.5 per cent in February compared with a year earlier, a drop from 8.6 per cent in January, the European Union's statistics agency Eurostat said Thursday. The figure was higher than analysts' expectations of 8.3%.

Inflation is down from its peak of 10.6 per cent in October but its persistence has surprised economists, with figures from Germany, France and Spain coming in higher than expected this week.

Prices for food, alcohol and tobacco rose 15 per cent, up from an already painful 14.1 per cent in January, outpacing even energy costs amid Russia's war in Ukraine. Energy prices grew 13.7 per cent from a year ago but were lower than the 18.9 per cent boost in January.

Higher prices for natural gas, used to heat homes, run industrial processes and generate electricity, have been a key factor pushing inflation higher across the economy. Russia cut off most supplies to Europe last year as it pressured governments over their support for Ukraine.

While natural gas prices have fallen as a mild winter reduces demand for heating, it will take months for those lower prices to work their way through to lower bills for consumers. Meanwhile, higher prices have led to workers demanding higher pay in wage negotiations, often through strikes and protests that have swept Europe.

More alarming than the headline figure was core inflation, which excludes volatile food and energy prices and can give a better sense of whether inflation is being baked into the economy over the longer term. That core figure rose to 5.6 per cent from 5.3 per cent.

European Central Bank President Christine Lagarde has indicated the bank will raise interest rates by another large half-percentage point at its March 16 meeting, and analysts expect more rate rises after that.

Interest rates influence the cost of borrowing across the economy, making it more expensive to borrow and spend and thus cooling off demand for goods.

As long as core inflation remains stubbornly high in the eurozone, the ECB will continue hiking rates and will not consider future rate cuts, said Carsten Brzeski, chief eurozone economist at ING bank.