Price Pressures Easing and Certainty About Inflation Trajectory Growing, ECB’s de Guindos Says

7 July 2023

By Xavier D’Arcy – FRANKFURT (Econostream) – Underlying price pressures are showing some signs of easing as uncertainty surrounding the path of future inflation also fades, European Central Bank Vice-President Luis de Guindos said on Friday.

In a speech at King’s College London, de Guindos said that labour costs were becoming the main driver of inflation in the euro area, as other price pressures faded.

Underlying price pressure, whilst remaining ‘strong’, had, according to most indicators, ‘started to show some signs of softening’, he said. Furthermore, ‘the unusually high level of uncertainty around the downward trajectory of inflation over the medium term has started to ease somewhat’, he noted.

Labour costs were ‘becoming a dominant driver of inflation’, he said, with wage pressures rising and the ECB factoring ‘strong wage growth’ into its inflation projections. Compensation per employee was ‘expected to continue to grow strongly in the coming months’, whilst simultaneously, firms in some sectors had ‘increased their profits, especially where demand outstripped supply.’

The ECB expected that wage growth would be absorbed by firms experiencing increased profits, and was ‘closely monitoring inflation dynamics in the services sector where these costs play a particularly important role’, he said.

Given the ‘unprecedented nature’ of the current situation, as well as ‘uncertainty around the strength and speed of the impact of past rate hikes on inflation’, the ECB would ‘continue to follow a data-dependent approach to determining the appropriate level and duration of restriction.’

The transmission of rate hikes was ‘well advanced’, he said, and the ECB was ‘now beginning to see the impact on parts of the real economy’.

‘Although underlying price pressures are moderating, they remain strong and confirm the upward revision to both headline and core inflation’, he argued. Therefore, the ECB’s job was ‘not yet done’, and both services inflation and labour costs needed ‘to be closely monitored, as they are now an important driver of overall inflation.’