Core euro zone inflation edges up in March, keeping ECB on alert

April 20, 2023

Euro zone inflation eased last month but underlying readings remained stubbornly high, Eurostat said today.

The latest figures confirmed preliminary data that raised worries at
the European Central Bank about the persistence of price pressures.

Consumer inflation in the euro zone eased to 6.9% from 8.5%, mainly
due to a rapid fall in energy costs as natural gas prices keep declining
after their surge a year ago on Russia’s invasion of Ukraine.

But ECB policymakers are now getting worried that high energy costs
have seeped into the broader economy and linger in everything from
services to wages, making inflation more difficult to tame.

Indeed, excluding unprocessed food and fuel, prices accelerated to
7.5% from 7.4% while an even narrower inflation measure that also strips
out alcohol and tobacco picked up to 5.7% from 5.6%, in line with
preliminary data.

Persistently high core readings is why most ECB policymakers have
already said that interest rates will need to keep rising, despite a
record-breaking 350 basis points of hikes since last July.

The debate now appears to be between a 25 basis point and a 50 basis
point increase at the May 4 meeting, with April inflation data, due just
two days before the decision, likely be the determining factor.

For now, markets are leaning towards the smaller move but investors
still see a one in three chance that the ECB goes for a bigger increase.

Bets that the Bank of England will also hike rates further in May
rose today after Britain became the only country in western Europe to
register double-digit inflation in March.

The ECB’s May rate hike is not likely to be its last, and markets now
see a total of 85 basis points worth of hikes before the 3% deposit
rate reaches its peak, or terminal rate.

The ECB’s main worry is that services inflation, now at 5.1%, is
simply too quick and could be signalling that wages are becoming a key
problem as services prices are predominantly determined by labour costs.

Another issue is that food inflation keeps accelerating and this has
an oversized impact on consumers’ inflation perception, potentially
changing spending behaviour and pressuring wage demands.

Unprocessed food inflation picked up to 14.7% last month from 13.9% in February.

Wages are rising by 5% to 6% this year, wages are still just catching
up after workers lost a chunk of their real income to inflation in
2022. But this rate is inconsistent with the ECB’s 2% inflation target,
so disinflation could be painfully slow.

The bloc’s labour market also remains exceptionally tight with
widespread workforce shortages likely across services this summer,
suggesting that wage pressures could still accelerate.

ECB policymakers see underlying price growth accelerating for another
few months before a plateau, and a meaningful decline may not come
before the autumn.

Article Source: Core euro zone inflation edges up in March, keeping ECB on alert

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