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Stubborn euro inflation is a fresh headache for the Bank of England

Inflation had been subsiding faster in the euro zone than in the UK. But now it appears to be stuck. (PA Archive)
Inflation had been subsiding faster in the euro zone than in the UK. But now it appears to be stuck. (PA Archive)

Inflation had been subsiding faster in the eurozone than in the UK. But now it appears to be stuck.

Today’s figures show that consumer prices rose 5.3% across the single currency area in August, the same rate as in July.

That was higher than the 5.1% consensus forecast, and still two-and-half times above the target, with food and drink prices the main culprit.

It delivers a tricky conundrum for officials at the ECB ahead of their decision on rates next month. ECB hawk Isabel Schnabel describes Euro inflation as “stubbornly high”, suggesting that a further turn of the interest rate screw is still likely.

The data will be keenly picked over at the Bank of England. Although the UK’s CPI is finally heading in the right direction, will it too get becalmed at around the 5% mark?

Energy prices are still roughly twice where they stood before the invasion of Ukraine, and wages rises look likely to remain inflated by the chronic labour shortages that have not gone away.

Inflation may well fall to a level at which Rishi Sunak can claim to have “delivered” the halving that he pledged at the start of the year. But it could prove a hollow victory, with the CPI seemingly incapable of dropping much lower than 5%.

That would raise huge dilemmas for the Bank. Does defending the 2% inflation target, come what may, still make sense in a world where that may not be achievable without inflicting punitive interest rates on an already fragile economy?

One for the Old Lady to ponder on.