Euro zone inflation eases a touch but services costs stuck

By Balazs Koranyi

(Reuters) – Euro zone inflation eased last month but a crucial services component remained stubbornly high, likely fuelling concern among some European Central Bank policymakers that domestic price pressures could stay at elevated levels.

Consumer inflation in the 20 nations sharing the euro currency slowed to 2.5% in June from 2.6% a month earlier, in line with expectations in a Reuters poll of economists, as a rise in energy and unprocessed food costs moderated.

While the ECB has long predicted that inflation will hover on either side of this level for the rest of the year, economists are scrutinizing underlying price trends to gauge whether the ECB can indeed bring inflation down to its 2% target next year.

This closely watched core inflation figure held steady at 2.9%, coming above expectations for 2.8%, mostly on a continued 4.1% rise in services prices.

The figures are unlikely to provide the ECB much clarity on where prices are heading and ECB President Christine Lagarde already said that more time is needed to be certain, so there should be no hurry to ease policy further.

While the price of goods has been muted for much of this year and energy inflation has also dropped, services have proven sticky, a phenomenon that has divided ECB policymakers.

Some argue that services developments merely follow other components with a delay and a moderation is in the pipeline, also to be helped by an economic rebound that should improve competitiveness.

Others, however, fear that labour shortages, rapid wage growth and poor productivity indicators in services could entrench rapid price growth and this could keep overall inflation above target for an extended period.

In a possible sign that labour market stress will persist, data on Tuesday showed euro zone unemployment holding steady at a record low 6.4% in May. The jobless rate is now more than a full percentage point lower than its pre-pandemic low while employment is rising.

The ECB lowered interest rates in early June to acknowledge earlier leaps in disinflation but made no commitment about subsequent moves, arguing it still lacked confidence that inflation was on track to target.

Policymakers nevertheless appear to agree that the next move is a cut and the only question is the timing. July is too early for such a move, many argue, but September is an open debate, especially if wage and prices trend data confirm ECB projection.

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