Eurozone inflation drops, but core measure hits record high on surge in services prices
Eurozone inflation has decreased in February for the fourth consecutive month, but a rise in services prices may prompt the European Central Bank (ECB) to continue raising interest rates in the coming months. Despite the decline in inflation, several of the eurozone's largest members have seen an increase in inflation, highlighting the challenge faced by central bankers in controlling it. Wage increases resulting from labor unrest and strikes across the region have contributed to the sticky inflation situation.
The overall inflation rate is expected to continue decreasing unless energy prices surge again, as they did following the start of the conflict in Ukraine. The sharp rise in food and services prices in February suggests that inflation may remain higher than anticipated by the ECB for a longer period. Recent surveys indicate a faster economic growth rate than predicted by the ECB's economists, leading some policy makers to call for larger rate rises.
The European Union's statistics agency reported that the eurozone's consumer prices in February were 8.5% higher than the previous year, which is a decrease from January's 8.6% rate and well below the peak of 10.6% in October. Italy is the only one of the four largest eurozone members that recorded a decrease in inflation, which compensated for small increases in other countries.
However, the eurozone's core measure of inflation, which excludes volatile items like food and energy and is a more reliable indicator of future price rises, reached a new record of 5.6% in February, up from 5.3% in January. This increase is mainly attributed to a jump in services inflation from 4.4% to 4.8%.
The ECB has indicated that it will raise its key interest rate from 2.5% to 3% at its next meeting on March 16. This decision has been reflected in recent movements in eurozone government bonds, which suggest that investors are expecting additional rate increases.
Companies shift focus to USA as green subsidies too attractive to pass on
Tesla recently announced a shift in its strategy away from Europe, aiming to take advantage of unprecedented subsidies in the United States. However, it is not alone in reconsidering investment decisions in Europe. Many multinational companies are following suit due to U.S. President Joe Biden's Inflation Reduction Act, which includes a record $369 billion in spending on climate and energy policies, including green subsidies for businesses.
This has raised concerns over competition for European companies and has upset politicians in the region, with Brussels now considering how to respond. Several European companies, including Northvolt, Linde, Volkswagen, and Enel, have already expressed interest in profiting from U.S. subsidies, with more potentially joining the list.
Last month, Tesla announced that it would reduce its investments in Germany and shift its focus to the North American market to take advantage of the IRA. The company stated on February 22 that the focus of its cell production is currently in the U.S. due to the IRA framework. Some businesses and analysts are considering the IRA too appealing to ignore, citing its simplicity as a significant advantage. In contrast, they consider the European Union machinery much more complex.
China's President, Xi Jinping, plans to revamp the country's economic policy team
Xi Jinping, is reportedly planning a significant government overhaul by appointing his most trusted allies to lead various sectors during the upcoming parliamentary session. This move includes replacing Premier Li Keqiang and his team of technocrats who have been credited with guiding the country's economy through the past five years. The financial sector and other significant portfolios could be restructured. At a meeting on Tuesday, Xi pledged "far-reaching" changes, which also include exerting more control over the technology and science sectors and increasing the party's involvement in "non-public enterprises," which could be worrisome for businesses.
The National People's Congress will begin on Sunday.
Adapted from WSJ, Reuters, CNBC, NYT, Forbes
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