Services Inflation Surges: Lagarde Worries About Labor Costs Fueling the Fire

Frankfurt, Germany – European Central Bank President Christine Lagarde expressed concerns about the rise in labor costs leading to an uptick in services inflation within the Eurozone. In June, inflation in services surged to 4.1% across the 20 countries using the euro, marking the highest level since October. This increase has persisted for eight consecutive months, highlighting the stability of services CPI around 4%.

Month-to-month, services CPI saw a significant jump of 7.4% annualized, continuing a trend of high volatility in readings over the past five months. These fluctuations typically peak in the first half of the year before tapering off in the second half. However, the current year’s month-to-month increases have been slightly more pronounced than the previous year, indicating a sustained trajectory towards the 4% mark for services inflation.

The rise in energy prices has moderated from previous highs but remains elevated, contributing to the overall inflation rate. Conversely, durable goods prices have decreased while food prices have maintained a steady increase below 2% year-over-year. This combination of factors underscores the persistent challenge of inflation in services, a sector where consumers allocate a significant portion of their expenditures.

The core Consumer Price Index (CPI), excluding food, energy, and tobacco products, experienced a 2.9% increase in June, aligning with the previous month’s figure. This metric, utilized by the ECB to track inflation against a 2% target, demonstrates the impact of a drop in goods prices compared to the steady rise in services CPI.

President Lagarde highlighted the critical role of wage growth in fueling services inflation during a panel discussion in Portugal. With wages and salaries rising substantially in several Eurozone countries, the prospect of slowing services inflation appears unlikely. As wage growth persists, there is a potential for services inflation to surpass the current 4% level, posing challenges for economic policymakers.

The ECB recently reduced its policy rate by 25 basis points to 4.25% amid concerns over the stagnating economic growth in the Euro area. While GDP growth showed signs of improvement in Q1 2024, the escalation of services inflation remains a key priority for the central bank.

Looking ahead, the interplay between wages, services inflation, and overall CPI dynamics will continue to shape the Eurozone’s economic landscape. As goods prices stabilize and services inflation remains elevated, the ECB faces the challenge of striking a balance between managing inflationary pressures and supporting economic growth.