(MENAFNING)
Headline inflation in the Eurozone rose sharply in May, driven mainly by rising services inflation. This effect was felt in several large countries, with Germany, Spain and France all seeing large increases. While base effects do play a role (think public transport ticket prices in Germany), this suggests that the final push to bring inflation back to target will not necessarily be easy.
With the ECB on the brink of a historic rate cut, doubts are growing about the future path of inflation. While many forward-looking indicators remain positive, a buoyant labor market, continued supply chain disruptions, and a recovery in purchasing power will likely spark interesting debates at the ECB Governing Council meeting that will decide the future direction of monetary policy.
Core inflation is likely to slow again, but the question is how fast. Services inflation remains elevated for now, but forward-looking indicators are gradually moving in the right direction. Nevertheless, we expect services inflation to remain well above our target at around 3.5% towards the end of the year. As demand for goods recovers on the back of rising real wages, goods inflation could pick up somewhat again towards the end of the year, as supply chain issues still constrain supply somewhat.
Wage growth is a key driver of inflation, but the first quarter's rise was unexpected. The ECB was right to dismiss it as a lump-sum payment in Germany, as other countries have slowed faster. That said, with unemployment at a record low of 6.4%, the slowdown in wage growth for the rest of the year is uncertain. For the ECB, the wage outlook is bright enough to cut rates next week for the first time since 2019. The question is how many cuts there will be, with May's inflation figures a warning that next week may not be the start of a traditional rate-cutting cycle.
MENAFN31052024000222011065ID1108281903
*Content Disclaimer:
This publication has been prepared by ING for informational purposes only, without regard to the assets, financial situation or investment objectives of any particular user. This information does not constitute an investment recommendation, nor is it investment, legal or tax advice or an offer or solicitation to buy or sell any financial instruments. For more information, please see: https://think.ing.com/about/disclaimer/
Legal Disclaimer:
MENAFN provides the information “as is” without warranty of any kind. We do not accept any responsibility or liability for the accuracy, content, images, videos, licenses, completeness, legality, or reliability of the information contained in this article. If you have any complaints or copyright issues related to this article, please contact the provider above.
