Euro zone inflation ticks up in April

Euro zone inflation accelerated last month, Eurostat said on Wednesday, confirming preliminary data pointing to increasingly stubborn price growth among the 20 nations sharing the euro.

Overall price growth accelerated to 7.0 per cent in April from 6.9 per cent a month earlier, as rising services and energy costs offset a slowdown in food price growth.

Although underlying price growth, the key focus of European Central Bank policymakers in recent months, slowed a touch, the crucial services component continued to accelerate, pointing to mounting wage pressures that could get inflation stuck above the ECB’s 2 per cent target.

Excluding volatile food and fuel prices, core inflation slowed to 7.3 per cent from 7.5 per cent, while an even narrower measure, which excludes alcohol and tobacco, slowed to 5.6 per cent from 5.7 per cent in its first decline since last June.

Inflation has been above the ECB’s 2 per cent target for nearly two years and the bank has lifted interest rates by a combined 375 basis points since last July to arrest runaway price growth.

But more hikes are likely as it could be 2025 before inflation is back at target and the “last mile” of disinflation, getting from 3 per cent to 2 per cent, could be especially difficult, taking nearly 2 years.

Services inflation, which is primarily driven by labour costs, accelerated to 5.2 per cent from 5.1 per cent, confirming policymaker fears that nominal wage growth could become dangerously fast.

Wages are still down in real terms given rapid inflation but low unemployment and growing labour scarcity, especially in services, is driving up nominal wages.

The ECB has long said that nominal wage growth of 3 per cent would be consistent with its inflation target but this year’s rise could be twice as fast.

Unexpectedly generous wage deals in Germany, the bloc’s biggest economy, also raise the risk that labour costs could continue to rise especially quickly next year, prolonging inflation.

Markets see the ECB’s 3.25 per cent deposit rate rising to just below 3.75 per cent this summer but some policymakers have already warned that this may not be enough.

Consumer and market based inflation expectations have both risen in recent months even as energy costs fall, suggesting that inflation is now more embedded than earlier, driven primarily by wages, services and domestic demand.

The ECB will next meet on June 15 and has essentially promised another rate hike then.