Inflation fears during the last few months have steadily dissipated across most geographies, with the notable exception of services, which remain extremely “sticky”.
Energy prices have plunged from their peak a year ago, booming food inflation has come off its high levels, and prices of manufactured goods have generally eased in line with improved supply lines. Yet inflation in services spiked to a new record high in the 20 European countries that use the euro.
In the Eurozone, the CPI for services spiked by 5.6% in July year-on-year, up from 5.4% in June and 5.0% in May.
Source: Wolf Street
Services are most important in developed economies, as it’s where consumers spend the majority of their money. Many services are essential to modern life, such as housing, rent and related services, healthcare, insurance, broadband and telecommunications, auto repairs, airfares, haircuts, entertainment, and so on. Inflation is notoriously hard to eradicate from services.
The European Central Bank (ECB) is worrying about inflation in services, and so has further tightened its ultra-loose monetary policies. Like most other central banks, the ECB has hiked its policy rates aggressively over the last year – indeed, by 4.25% since July 2022 (when the deposit rate was still negative -0.5%).
When it last hiked by 25 basis points on 27 July, the ECB lifted its deposit rate to 3.75%, the highest since 2002. The ECB said that “underlying inflation remains high overall,” but was careful to specifically emphasize services inflation, which has become a headache due to its link to wages.
At her post-meeting press conference, ECB president Cristine Lagarde said, “The drivers of inflation are changing. External sources of inflation are easing. By contrast, domestic price pressures, including from rising wages and still robust profit margins, are becoming an increasingly important driver of inflation.”
The battle against inflation in many economic sectors may be nearing its end, but as far as services are concerned, it is still very much in the frame.
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