ECB’s de Guindos: Services Inflation ‘Most Worrisome’, Wages and Profits Also Need Monitoring

25 May 2023

By Xavier D’Arcy – FRANKFURT (Econostream) – European Central Bank Vice President Luis de Guindos said on Thursday that service prices were the most worrisome element of the inflation outlook and that policymakers were paying very close attention to wages and profits as supply pressures faded.

Speaking at the presentation of the ECB’s 2022 annual report at the European Parliament in Brussels, he said that core inflation would prove to be far stickier than headline price growth had been.

It was ‘quite clear’ that headline inflation was ‘going to decline rapidly’, he said.  ‘Whereas in the case of core inflation it's going to be much, much, stickier.’

This was because ‘the drivers of inflation are mutating, they are changing from energy prices, supply bottlenecks’, and now the ECB was ‘paying much more attention to the evolution of wages and the evolution of profit margins’, he said.

‘In the case of core inflation - and this is a personal view - the part that is much more worrisome is service price inflation’, he said. There were two components driving high services price pressures, he argued. ‘The demand for services is clearly currently on the rise.’

Simultaneously, services were ‘very sensitive to the evolution of wages’, he said. ‘So that's something that we are monitoring very closely. And from my personal standpoint, I think that this is going to be the most worrisome element of core inflation and inflation in general.’

A further ‘important factor’ for the inflation outlook was ‘the behaviour of fiscal policy’. Governments ‘should roll back the related support measures promptly and in a concerted manner to avoid driving up medium-term inflationary pressures, which would call for a stronger monetary policy response’, he said.

In his introductory remarks, he closely echoed recent ECB language, saying that ‘our future decisions will ensure that the policy rates will be brought to levels sufficiently restrictive to achieve a timely return of inflation to our 2% medium-term target and will be kept at those levels for as long as necessary.’

‘We will continue to follow a data-dependent approach to determine the appropriate level and duration of restriction, taking into account the highly uncertain environment’, he said.