The headline inflation rate in the euro zone rose in April, according to preliminary data released Tuesday, remaining significantly above levels targeted by the European Central Bank but core price growth showed a surprise slowing.
Headline inflation came in at 7% for last month, according to Eurostat, after it dropped to 6.9% in March. At the same time, core inflation, which excludes food and energy prices, stood at 5.6% in April — from 5.7% in March. Analysts polled by Reuters had estimated a figure of 7% for headline inflation and 5.7% for core.
The latest figures come just days before the ECB is due to announce a new monetary policy decision Thursday. Rather than providing some clarity on how much the central bank might raise rates by, the latest numbers have blurred the picture somewhat.
Market players have been debating whether the central bank will hike Thursday by 50 or 25 basis points. On the one hand, the rise in headline inflation could push hawkish members of the ECB to argue for another 0.5 percentage point increase. On the other hand, the unexpected slowdown in core price growth could tilt the balance toward a more dovish stance and result in a compromise rate hike of 25 basis points.
"The small decline in core HICP inflation in April leaves it close to its all-time high and will not resolve the debate between 25bp and 50bp for the ECB this week," Andrew Kenningham, chief Europe economist at Capital Economics, said in a note.
However, Carsten Brzeski, global head of macro at ING, said "sticky inflation data clearly stresses the need to continue hiking but with last week's weaker-than-expected GDP growth report and today's weak loan growth and loan demand data, the case for slowing down the pace and size of rate hikes has become stronger."
The euro zone economy grew by 0.1% in the first quarter of the year, according to preliminary figures out Friday. This was below market expectations.
The central bank embarked on its current hiking path in July 2022, when it brought its main rate from -0.5% to zero. The ECB's main rate is currently at 3%.
Despite the consistent rate increases, inflation remains above the ECB's target of 2%. Estimates published last week by the International Monetary Fund suggested that headline inflation will not come close to the ECB's target until 2025.
"Further tightening is required, and when the terminal rate has been reached, that terminal rate needs to be maintained for longer, because core inflation is ... high, and it's very persistent. And there's nothing worse than pausing an inflation fighting effort too early, or abandoning it too early because if you need to do it a second time, the costs to the economy are so much larger," Alfred Kammer, director of the European department at the IMF, told CNBC Friday.
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