It is a measure of the strange economic times that we are living through that a euro zone inflation rate of 10 per cent – and an Irish rate of 9 per cent – can be greeted as positive news. The initial estimates for inflation in November showed the first fall for almost a year and a half in the annual rate for the single currency area. It will lead to speculation that inflationary pressures may have peaked, though it is too early to say this with confidence. And for now the rate of price increases is, of course, still punishingly high.
The rapid rise in the inflation rate, driven in part by higher energy prices, is making life difficult for households and businesses, meaning governments across Europe have had to step in again with support programmes. The figures also show that inflationary pressures have spread well beyond energy and food to a wide range of goods and services.
A fall off in inflationary pressures would be very welcome – and any better news on energy prices could bring down overall price pressures next year more quickly than forecasters have expected. However with the war in Ukraine looking set to drag on and real winter weather yet to set in, energy price trends are hard to predict.
There are a few important policy implications. One is a dilemma for the European Central Bank about how quickly to continue its interest rate increases. The immediate issue is whether to opt for a 0.75 point or 0.5 point increase at its next meeting in December. The lower figure may be appropriate, given the uncertainty about the inflation outlook and the risks to the euro zone economy.
There are also policy questions for governments. An easing of inflation would reduce pressure a bit on households and businesses. But one factor must be remembered; while the inflation rate is likely to fall next year, the actual level of prices will remain high. Supports for households and businesses may well need to be extended, at least for a time.
Meanwhile the longer term questions about energy markets and security of supply will continue to loom large.