ECB’s Lane: Lower Goods and Services Inflation a ‘Welcome Development’

5 September 2023

By David Barwick – FRANKFURT (Econostream) – European Central Bank Executive Board member Philip Lane on Tuesday struck a generally positive tone on the latest euro area inflation developments, predicting continued easing of core readings and highlighting the reduced price pressures from goods and services.

In an interview with Irish online news outlet The Currency, Lane noted the August easing of core inflation.

‘So goods inflation and services inflation came down, which is very welcome’, he said. This would need to continue, he added.

The ECB anticipates that the price surges of a year ago would now drop out of the data. ‘So we do expect to see this famous core inflation come down throughout the autumn’, he said.

Energy and food prices would exhibit ‘some bumpiness’, he allowed. ‘But let me summarise that as: the latest data show that inflation is standing at 5.3% overall, which remains high, but in terms of looking for signals of momentum and signals of directional change, I would underline the fact that there has been some easing in goods inflation and services inflation, which is a welcome development.’

Speculation about summer tourism leading to potentially ‘quite strong services inflation’ was not borne out, he indicated.

‘The most visible change over the summer was some turnaround in both the oil and gas markets’, he said. ‘That remains a major source of uncertainty. As you know, in some of the gas markets, it has to do with some factors which may dissipate. But what I would say is that, after having seen a lot of welcome downward drift in energy inflation for most of the year, we will be keeping an eye on this situation.’

Still, the halving of headline inflation already seen would be joined by ‘further progress expected this year’, he said, though he noted that this was ‘a multi-year process because there is a second round.’

Second-round effects would peak this year, a year of ‘significant wage increases’, he said. The latter were however ‘crucially, on a declining path’.

The need for second-round effects to dissipate was what prevented inflation from reverting to target faster, he said.

‘The policy challenge is to contain it, to make sure that the second round is contained and does not become embedded’, he said.

Restoring price stability in a timely manner meant achieving this with sufficient speed for all to realise that high inflation is not going to last, he said, so that long-term behaviour need not adjust as if it would.

‘We want people to understand that this is a temporary inflation episode’, he said. ‘It’s not going to disappear overnight, but at the same time it would be a mistake to extrapolate the high inflation we’ve seen into a longer-term projection.’

Lane was sanguine about the outlook for the profit component of inflation, which would decline this year and in following years, he said.

‘That environment, which was so supportive of price increases, we don’t think it’s there and we think it’s going to get even more restrictive over time’, he said.