What's going on?

European inflation is rising (i.e. prices are increasing more quickly). As a result, the European Central Bank (ECB) may face some tough questions on whether to keep interest rates so low!

What does this mean?

Like most central banks, the ECB doesn�t like it when inflation goes too high or low, so it tries to keep it close to 2%. In recent years, inflation has been well below that target. The ECB has kept interest rates at a historically low level in an effort to try to revive inflation (lower interest rates make it easier to borrow money and buy things, and therefore pushes up prices). Its actions have included directly buying government bonds (a.k.a. quantitative easing), which lowered interest rates even further. But now that inflation is picking up substantially, some investors are wondering if the ECB will reverse course and take its foot off the gas.

Why should I care?

For markets: If the European economy keeps heating up, the ECB could back off.

The signs are that the European economy is heating up, so the question may turn to whether the ECB will become less supportive. That would mean higher interest rates� which is bad for bonds but also typically good for the euro, because currencies of countries that pay more interest tend to see greater demand (why? click here).

The bigger picture: It�s hard to pin inflation down to just one number.

The inflation rate increased to 1.8% from 1.1% last month � so, much closer to the 2% target. But this was mainly due to a big increase in energy prices, e.g. oil and gas. Stripping out this energy price increase (which is called �core inflation�), the figure didn�t change very much. And so the ECB could hold off from changing its policy significantly, unless other prices start picking up too. But the low interest rates have been making it tough for savers, e.g. for people saving toward a house deposit or those with retirement pots � so the ECB may face some difficult decisions ahead.