The annual inflation rate in the 20 countries that use the euro currency was unchanged at 5.3% in August, according to the preliminary estimates released by Eurostat, the European Union’s statistical office, on Thursday. This was in line with the expectations of economists polled but still well above the 2% target of the European Central Bank (ECB).
The core inflation rate, which excludes volatile food and energy prices, eased slightly to 5.3% in August, from 5.5% in July. The main drivers of inflation were food, alcohol, tobacco and services, although their prices rose at a slower pace than the previous month. Energy prices increased by 3.2% compared with July, reducing the annual rate of decline to 3.3% in August, from 6.1% in July. This was mainly due to the rising oil prices in the last few weeks.
The stable inflation rate comes amid growing signs of a deepening economic slowdown in the eurozone, especially in Germany, the bloc’s largest economy. Germany’s business activity contracted for the third consecutive month in August, reaching the lowest level since November 2020. The eurozone’s Purchasing Managers’ Index (PMI), a measure of business activity, also fell to a seven-month low of 51.1 in August, from 51.8 in July. A reading above 50 indicates expansion, while below 50 signals contraction.
The persistent inflation and weakening growth pose a dilemma for the ECB, which has been raising interest rates since April 2020 to curb inflationary pressures. The ECB’s benchmark interest rate stands at 3.75%, after nine consecutive hikes. However, some analysts and policymakers have called for a pause or a reversal of the tightening cycle, given the worsening economic outlook and the uncertainty caused by the coronavirus pandemic and its variants.