Prices are a cause for concern – ECB director warns: inflation will still be bumpy

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Despite the recent slight easing, inflation in Austria is still well above the EU average. ECB director Isabel Schnabel now warns that you should not expect the situation to improve too quickly. So the decline could be bumpy.

The journey towards economic normality could be a difficult affair. The biggest concern is the development of services prices, the member of the six-member management team of the European Central Bank (ECB) said at a monetary policy conference in Frankfurt on Thursday.

“A consensus seems to be emerging that we’re in for a pretty bumpy last mile.” Wage growth in the eurozone remains relatively strong, “but appears to be gradually weakening, in line with our projections.” Governing Council responsible for the concrete implementation of monetary policy.

The end is slowly coming into view
Inflation in the euro area has fallen steadily recently – from 2.8 percent in January and 2.6 percent in February to 2.4 percent in March; in Austria this recently stood at 4.3 percent. This means that the monetary authorities’ inflation target of 2.0 percent, which they consider optimal, is no longer far away. As recently as the autumn of 2022, the percentage in the community of twenty countries sometimes exceeded ten percent. Investors in the financial market currently estimate a 64 percent chance that the ECB will cut interest rates again for the first time at its next interest rate meeting on June 6.

Inflation in the services sector and wage growth are two factors that monetary authorities are currently focusing on on the road to a first interest rate cut. In the service sector, inflation is often above two percent, according to Schnabel. She noted that inflation in goods had fallen rapidly, while inflation in services was proving to be persistent.

Do personnel costs drive prices up further?
“One aspect we are looking at very closely is the development of unit labor costs,” says Schnabel. The ECB is concerned about labor productivity. Because this has been declining for a number of quarters now. “And the important question is: what part of this is cyclical, meaning that this will disappear over time, and what part of it could be structural?” According to the German economist, the ECB must continue to monitor the extent to which companies do this. ‘Higher costs exceed their profit margins.

In its forecasts, the ECB assumed that companies would be able to do this to a significant extent, she said. In the background, euro watchdogs fear that companies will respond to increased labor costs with price increases – which would fuel inflation again.

Source: Krone

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