Insight: why is inflation in the Eurozone still rising?

18 May 2023 - 13:27

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Inflation in the Eurozone dates back to April, keeping tension high on ECB policy and on the forthcoming decision to raise rates. Here’s why prices have gone up and what to expect.

Insight: why is inflation in the Eurozone still rising?

Eurozone inflation accelerated last month according to Eurostat, confirming preliminary data pointing to increasingly stubborn price growth among the 20 nations that share the euro.

The news is not heartening and, above all, it still offers an opportunity for the ECB to continue its monetary policy of rising interest rates.

The stickiness of core inflation remains a problem in the short term for the ECB, even if the figure showed a slight slowdown in the increase. The updates just published join the inflation and growth forecasts for 2023 and 2024 that the EU Commission has revised. Considering the inflation numbers for April and the latest projections from Brussels, there is still a long way to go for Lagarde and her members.

The European Commission projects an annual inflation rate of 5.8% in 2023 and 2.8% in 2024, and core inflation to average 6.1% in 2023 before declining to 3.2% in 2024.

However, in April Eurozone inflation rose again: why?

Inflation in the Eurozone is rising again: by how much?

Overall price growth in the Eurozone accelerated to 7.0% in April from 6.9% the previous month, as rising energy and services costs offset the slowdown in rise in food prices.

Despite growth of core prices, the main policy focus of the European Central Bank in recent months, has slowed somewhat, the core services component has continued to accelerate, indicating rising wage pressures which could keep the inflation above the ECB’s 2% target.

Excluding volatile food and fuel prices, core inflation fell to 7.3% from 7.5%, while an even narrower measure excluding alcohol and tobacco fell to 5.6% from 5.7% in its first decline since last June.

It should be highlighted, according to the Eurostat note, that the lowest annual rates were recorded in Luxembourg (2.7%), Belgium (3.3%) and Spain (3.8%). The highest, however, emerged in Hungary (24.5%), Latvia (15.0%) and the Czech Republic (14.3%). Compared with March, annual inflation decreased in twenty-two Member States and increased in five

Why prices are rising in the Eurozone: pay attention to services and wages

According to some analyses, it will now take 2025 for inflation to return to the ECB’s 2% target and the last step of disinflation, i.e. the shift from 3% to 2%, could be particularly difficult, taking almost 2 years .

The focus is now on services inflation, mainly driven by labor costs, which has increased to 5.2% from 5.1%, confirming policymakers’ fears that nominal wage growth could become dangerously fast.

Wages are still declining in real terms due to rapid inflation, but low unemployment and growing labor shortages, especially in services, are pushing up nominal wages.

The ECB has long said that nominal wage growth of 3% would be consistent with its inflation target, but this year’s increase could be twice as fast.

Wage deals unexpectedly generous in Germany, the bloc’s largest economy, also raise the risk that labor costs could continue to rise particularly rapidly next year, prolonging inflation.

Finally, it should be noted that market- and consumer-based inflation expectations have both increased in recent months, even as energy costs have fallen, suggesting that inflation is now more entrenched than before, mainly driven by wages, services and domestic demand.

Original article published on Italy 2023-05-17 12:51:26. Original title: PerchĂ© l’inflazione in Eurozona sale ancora?



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