Will Eurozone Core Inflation Remain Stubbornly High?

The Eurozone, made up of 19 different countries and more than 340 million citizens, has been struggling with the challenge of keeping headline inflation at close to its target for several years now. In particular, despite significant monetary easing efforts by the European Central Bank (ECB), core inflation remains stubbornly high across the region. So what is causing Eurozone core inflation to remain so high – and can it be fixed?

What is Core Inflation in the Eurozone?

In any economy, inflation is defined as “the rate at which the general level of prices for goods and services is rising”. Core inflation, on the other hand, is the measure of inflation after excluding volatile items such as energy, food, alcohol and tobacco. The logic is that the volatile items are always subject to change and do not always represent patterns or trends in the economy. Thus, by monitoring core inflation, economists are able to better identify patterns or trends that could influence monetary policies.

Why is Eurozone Core Inflation So High?

It is clear from looking at the figures that despite significant efforts from the ECB to stimulate the economy, the Eurozone is currently experiencing higher than average core inflation levels. So what is the cause of this persistent issue?

1.Global Prices: One of the main influences on Eurozone core inflation is the rise in global commodity prices. As the Eurozone is intimately linked to many of the world’s major economies, when prices of commodities such as oil and gas increase, the Eurozone feels the impact.

2.Euro Appreciation: Another factor contributing to the stubbornly high levels of core inflation in the Eurozone is the appreciation of the currency itself. The Euro has been on an upward trajectory since the start of this decade and this appreciation has led to imports becoming more expensive and subsequently, prices rising in the Eurozone.

3.Weak Productivity: The sluggish growth in productivity in Europe is also having an impact on Eurozone core inflation. As productivity growth has been slower than expected, wages and prices for goods and services have been pushed higher, resulting in a rise in inflation.

4.Economic Policy Uncertainty: The lack of decisive action from governments in the Eurozone and the subsequent uncertainty has added to the problem. Economic decision-makers have not been able to agree on a consistent and effective policy for tackling the issue, leaving businesses and markets unable to predict the future and uncertain about investments.

Can Eurozone Core Inflation Be Fixed?

Despite the various reasons outlined above as to why core inflation remains so high in the Eurozone, there are some solutions which could be implemented to help reduce the issue.

1.Monetary Policy: The ECB has taken a number of steps to try and tackle the issue of high Eurozone core inflation, and it is likely that further monetary policy decisions will be taken in the future.

2.Structural Reforms: Structural reforms such as labour market reforms and reforms to competition policies could be implemented to help boost productivity and subsequently, wages and prices.

3.Fiscal Policy: Emerging markets could benefit from more targeted investment and better use of local resources, and this could also help to reduce core inflation levels.

4.Exchange Rates: Another option would be to coordinate Euro exchange rate policies to ensure that the currency remains stable and thus preventing it from appreciating too much.

It is clear that the challenge of keeping Eurozone core inflation low remains an ongoing problem for the European economies. However, by taking suitable measures to address the factors that are causing inflation to remain stubbornly high, it is possible to reduce the problem and ensure that monetary policies remain effective.