Euro zone inflation eased last month but underlying readings remained stubbornly high, Eurostat said on Wednesday, confirming preliminary data that raised worries at the European Central Bank about the persistence of price pressures.
Consumer inflation in the 20 nations sharing the euro eased to 6.9 per cent from 8.5 per cent, primarily on 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 per cent from 7.4 per cent while an even narrower inflation measure that also strips out alcohol and tobacco picked up to 5.7 per cent from 5.6 per cent, 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 3.5 percentage points of hikes since last July.
The debate now appears to be between a quarter and half a percentage 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 on Wednesday 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 per cent deposit rate reaches its peak, or terminal rate.
The ECB's main worry is that services inflation, now at 5.1 per cent, 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 per cent last month from 13.9 per cent in February.
Wages are rising by 5 per cent to 6 per cent 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 per cent 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. -- Reuters
