Eurozone inflation dropped for a third month. Which countries in Europe are still feeling the pinch?

Eurozone inflation dropped for a third month. Which countries in Europe are still feeling the pinch?

Inflation across Europe has dropped for the third consecutive month in January, according to preliminary data shared by Eurostat, the European statistics agency, on Wednesday.

Eurozone annual inflation is expected to be down to 8.5 per cent in January 2023, down from 9.2 per cent in the previous month.

In December 2022, inflation finally dropped from double figures after it surged to a 41-year high of 11.1 per cent in October. In November, inflation started to decline and was estimated at 10.1 per cent.

Even as the majority of eurozone countries saw a decrease in inflation since the heights of October 2022, seven countries remain in the double digits in January.

Though the January data is undoubtedly positive, inflation in Europe remains much higher than the European Central Bank (ECB)'s target of keeping the eurozone area below 2 per cent.

Driven by energy and food, eurozone inflation set new records every month since November 2021. The situation had worsened since the spring with market disruptions related to the war in Ukraine.

Unusually warm temperatures earlier in autumn and winter meant energy prices largely returned to pre-war levels, but energy remains the main driver of inflation in Europe. In January, increased energy prices contributed 17.2 per cent to the total rate of inflation, while food, alcohol, and tobacco equalled 14.1 per cent.

The Baltic countries continue to be the hardest hit.

Latvia, in particular, is experiencing the highest levels of inflation in the Eurozone at an estimated 21.6 per cent in January, up from 20.7 per cent in December, compared to 7.5 per cent a year ago. In Lithuania and Estonia, inflation remains high at 18.4 and 18.8 per cent respectively.

In five countries - Estonia, Spain, France, Latvia, and Austria - inflation increased in January.

The sharpest drops in inflation between December and January were in Belgium and the Netherlands, where it eased respectively by 2.7 per cent and 2.6 per cent.

Here is a look at the inflation rate in each country in Europe:

Following in the footsteps of its counterparts in other parts of the world, in July the European Central Bank (ECB) raised interest rates for the first time in 11 years by a larger-than-expected amount, as it targets stubbornly high inflation.

This was followed by another record rate hike in September, raising new questions about whether the rush to make credit more expensive and keep inflation in check will plunge major economies into recession.

On October 27, the ECB raised interest rates again, hiking its deposit rate by a further 75 basis points to 1.5 per cent - the highest rate in more than a decade.

On November 29, the president of the ECB, Christine Lagarde, warned that inflation in the eurozone had not peaked and risked rising even higher than predicted - fuelling expectations of further rate hikes.

"We stand ready to adjust all of our instruments within our mandate to ensure that inflation returns to our medium-term inflation target," she said last month.

What's causing these inflation rates?

Europe and much of the wider world were already being hit with soaring energy prices - which contribute to inflation - before Russia's invasion of Ukraine in late February.

The conflict has exacerbated the energy crisis by fuelling global worries it may lead to an interruption of oil or natural gas supplies from Russia. Moscow said in September it would not fully resume its gas supplies to Europe until the West lifts its sanctions.

Russia typically supplies about 40 per cent of Europe's natural gas.

The prices of many commodities - crucially including food - have also been rising ever since COVID-19 pandemic lockdowns were first introduced two years ago, straining global supply chains, leaving crops to rot, and causing panic-buying in supermarkets.

The war in Ukraine again dramatically worsened the outlook, as Russia and Ukraine account for nearly a third of global wheat and barley, and two-thirds of the world's exports of sunflower oil used for cooking. Ukraine is also the world's fourth-biggest exporter of corn.