Underlying price pressures finally easing in the eurozone

UNDERLYING inflation pressures, a key focus for European Central Bank policymakers, are finally easing across the eurozone and past rate hikes have started to work their way through the economy, ECB Vice President Luis de Guindos said on Friday (Jul 7).

The ECB has raised interest rates at every meeting over the past year and promised another hike this month, arguing that it cannot stop tightening policy until it sees a marked turnaround in the outlook for underlying prices, which filter out volatile food and energy costs.

“While underlying price pressures remain strong, most indicators have started to show some signs of softening,” de Guindos said in London. “While still wide by historical standards, the range of measures of underlying inflation recently began to narrow.”

Still, de Guindos added that inflation remains far too high, so the ECB’s job it not yet done, a remark seen confirming that there is no debate about the July move and the next live meeting is only in September.

“Services inflation, and labour costs in particular, need to be closely monitored, as they are now an important driver of overall inflation,” he added.

While policy doves, mostly on the bloc’s southern periphery, are increasingly advocating a pause in rate hikes, hawks, who are still in a comfortable majority, are not yet backing down, arguing that a lot more evidence is needed that underlying price pressures are easing.

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De Guindos also said that the ECB’s past hikes will continue to impact inflation for years to come as it takes time for policy to be transmitted to the real economy.

“Owing to the tightening, inflation in 2022 was only half a percentage point lower than it would have otherwise been, while the downward impact is expected to average two percentage points over the period 2023-25,” he added. REUTERS