«Inflation is expected to fluctuate around current levels in the coming months, before decreasing to reach the 2 percent target next year, as a result of weaker growth in labor costs, the unfolding effects of restrictive monetary policy pursued by the Governing Council and the waning impact of the energy crisis and the pandemic. Measures of longer-term inflation expectations remain substantially stable, remaining mostly around 2 percent”, reads the ECB’s Economic Bulletin no. 3 of 2024. Overall inflation in the Eurozone, however, “gradually continues its disinflationary path, reflecting the decline in growth rates for food and non-energy industrial goods”. The lower growth rate for non-energy industrial goods, explain the central bank’s economists, “is determined by the continuing attenuation of inflationary pressures, despite the slight increase in energy inflation which is largely attributable to base effects”.
The issue of service inflation
«Goods inflation is decreasing rapidly, while goods inflation
services remains resistant”, explains Isabel Schnabel, member of the ECB executive council, in her speech at the inaugural conference of the ChaMP (Challenges for Monetary Policy Transmission) network, underlining
as the shift between prices and wages is stronger for services, also due to more resilient demand. More generally – added Schnabel – profit margins are expected to absorb higher unit labor costs, but risks remain. Among these, geopolitical risks and the consequent increase in energy prices remain in the foreground, but also those linked to possible climate shocks and the increase in food prices.
The expectation of a rate cut
But this does not exclude a rate cut, albeit with a reduction prospect that is still rather uncertain. The ECB writes that «if an updated assessment of the inflation outlook, the dynamics of underlying inflation and the intensity of monetary policy transmission were to
To further strengthen the Governing Council’s confidence in a stable convergence of inflation towards the target, it would then be appropriate to reduce the current level of monetary policy tightening. In any case, to determine the appropriate level and duration of the restriction, the Governing Council will continue to follow a data-driven approach, whereby decisions are defined on a case-by-case basis at each meeting, without binding itself in advance to a particular setting path of rates”.
Wage dynamics
Inflation is obviously also linked to salary dynamics and contract renewals. “At the end of 2023, wage pressures eased slightly and in 2024 they should ease further”, adds the ECB which underlines that in the fourth quarter of 2023 the growth of actual wages, measured by income per employee and hourly wages, fell respectively to 4.6 and 4.4 percent, from 5.1 and 5.0 percent in the third quarter. «The forward-looking wage indices signal the continuation of wage pressures that are still strong, although moderating. Information on salary agreements, available since the end of last year,
suggest that average growth in contractual wages in 2024 has gradually declined across all active remuneration contracts, including one-offs, from 4.4 per cent at the time of the January Governing Council, to
4.2 percent of the March Governing Council and 4.1 percent of the April Council”.
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