Prices cause concern

ECB director warns: inflation will still be bumpy

Energy prices are no longer having a positive effect on inflation, and the next few months could be an economic rollercoaster.

(Bild: APA/AFP/Pablo VERA)

Despite the slight easing recently, inflation in Austria is still well above the EU average. ECB Director Isabel Schnabel warns that the situation should not be expected to improve too quickly. The decline could therefore be bumpy.

The home stretch towards economic normality could be a rocky one. The biggest concern is the development of service prices, said the member of the six-person management team of the European Central Bank (ECB) at a monetary policy conference in Frankfurt on Thursday.

"There seems to be an emerging consensus that we could be facing a pretty bumpy last mile." Wage growth in the eurozone remains relatively strong, "but it seems to be gradually weakening in line with our projections". Schnabel is responsible for the concrete implementation of monetary policy in the ECB Executive Board.

Central bank director Schnabel is particularly concerned about prices for services.

(Bild: APA/AFP/ANDREW CABALLERO-REYNOLDS)

The end is slowly in sight
Inflation in the eurozone has recently fallen steadily - from 2.8 percent in January and 2.6 percent in February to 2.4 percent in March. In Austria, it recently reached 4.3 percent. This means that the monetary authorities' inflation target of 2.0%, which they consider to be optimal, is not far away. In the fall of 2022, the rate in the 20-country community was still above ten percent at times. Investors on the financial market currently estimate the probability at 64% that the ECB will lower interest rates again for the first time at its next meeting on June 6.

Inflation in the services sector and wage growth are two factors that the monetary authorities are currently focusing on on the way to a first interest rate cut. According to Schnabel, inflation rates in the services sector are often still above two percent. She pointed out that inflation in goods had fallen quickly, while it had proved to be persistent in services.

Arepersonnel costs continuing to drive up prices?
"One aspect that we are looking at very closely is the development of unit labor costs," said Schnabel. The ECB is concerned about labor productivity. This has been falling for several 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 can absorb higher costs through their profit margins.

In its forecasts, the ECB had assumed that companies would be able to do this to a considerable extent, she said. In the background, the euro guardians are concerned that companies will react to higher wage costs by raising prices - which would fuel inflation once again.