ECB’s Schnabel: Unit Labour Costs and Services Inflation Still Concerning

25 April 2024

By Isabel Teles – FRANKFURT (Econostream) – European Central Bank Executive Board member Isabel Schnabel on Thursday said that services inflation was still a worry and that it was necessary to remain watchful of unit labour costs.

Speaking at a conference on monetary policy transmission at the ECB, Schnabel said, ‘Some risks remain; one aspect that we are looking at very vigilantly is the development of unit labour costs.’

While wage growth seemed to be gradually easing, productivity growth had been negative for several quarters, she said, which made it important to assess how much of that behaviour was cyclical and how much structural.

‘If you look at the GDP deflator as a measure of domestic inflation, you can see that unit labour costs continue to contribute strongly, whereas the contribution of unit profits has come down quite a bit, which seems to point to higher absorption of higher costs through profit margins’, she said ‘But this is certainly also an area to be watched because our projections assume quite a bit of absorption of higher costs through profit margins.’

Services inflation was a major source of concern, she said, as around 90% of items had inflation rates above 2%, meaning that the reversal that had been seen in goods wasn’t present there.

‘Staff analysis from the ECB have shown that the wage-price pass-through is much stronger for services, and one of the reasons could also be quite resilient demand’, she said.

‘So, this is clearly something to be watched, because the whole story of absorption of higher costs via profits relies on the fact that demand is dampened by monetary policy. But the question is whether the dampening effect on services is as strong’, she elaborated.

The first part of the disinflation process, despite of being ‘quite impressive’, was mostly due to the reversal of supply-side shocks, she said, while domestic inflation was stickier, and ‘where monetary policy transmission is biting’, she said.

It was important to look at potential risks from new supply shocks, she said, citing geopolitical developments, energy prices and extreme weather events.

‘So far the reaction of energy prices to geopolitical risks has been relatively mild, but this of course remains to be monitored’, she said.