Core inflation at 5% after the summer will force the ECB to further cool GDP

Core inflation does not let up in the Eurozone. The rate that excludes energy and fresh food from its calculation, as they are more volatile, has set a new all-time high in the region in March at 5.7% and everything indicates that it will continue at very similar levels for a few more months, except during spring and summer. The persistence of this phenomenon, which reflects more structural tensions in prices, when financial turbulence is still very present and the region’s economy is set to slow down by the end of the year, keeps the Governing Council of the European Central Bank divided ( ECB), which will have to rule on interest rates at a new meeting on May 4.

At the investment bank Goldman Sachs place core inflation at between 5.5% and 5.6% through June. Barclays sees her still at 5.5% in August, after having marked, in all probability, a new all-time high in April. The rise in prices in services, driven by the increase in wages, would be behind these tensions, but it would not be the only explanation. Such a perspective would force the ECB to continue tightening monetary policy for longer, after the fastest rate hike since the creation of the euro, which will tend to further cool the region’s economy. The vice president of the issuing bank, Luis de Guindos, recalled last Friday that ultimately what the entity is looking for is a reduction in activity, since “there is no other way” to control the rise in prices.

Increased wages and business margins

The US firm points out that the increase in unit profits currently accounts for more than half of the growth in the GDP deflator, while the increase in compensation per employee accounts for just over a third. Although the growth of unit profits has been strong in all sectors, after reopening the economy with the end of the pandemic, services facing the public and energy have been the ones that have contributed the most to their increase, the entity points out in a recent report to which this newspaper has had access.

However, they consider that after the sharp fall in gas prices, unit profits in the energy industry should also decrease. To this they add that, according to the indicators it manages, the rise in margins would be reaching its ceiling. “Historically, rising wages have also led to slower margin growth, as part of the rise in labor costs is absorbed into company profits,” they explain. Thus, they estimate that the increase in margins should cool off quite quickly, especially in a context of slowdown in activity in the Eurozone between now and the end of the year.

The inflation outlook, therefore, depends on a combination of the two factors: higher wage increases are likely to push up inflation, while the prospects for more moderate margins for companies are likely to weigh on it. Thus, Barclays analysts place core inflation at 4.3% for September and believe that it will have moderated to around 3.2% already in December. The ECB remains attentive to the evolution of the underlying, which will be key when deciding new increases in the price of money. “Inflation had begun a process of falling, now we are above 6%, but the core is behaving more sticky,” warned the former Spanish Minister of Economy and Competitiveness.

Regarding the general rate, food has taken over from energy and is now the component that contributes the most to the rise in prices. On the contrary, the contribution of energy has become negative for the first time since February 2021. Food prices, specifically, have accelerated their year-on-year rise to 14.7% in March, when they had already become more expensive. an average of 13.9% in February. Despite the pressure exerted by these products on the shopping basket, Goldman Sachs expects general inflation to continue moderating in the euro zone, so that stands at around 3.3% year-on-year for the fourth quarter of the year. Despite this, and due to what is known as the ‘base effect’ or step effect’, the annual rate would rise to 3.8% for the month of December.

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