In other eurozone news, the region’s annual inflation rate ticked up to 2% in June. This spike was largely driven by soaring energy costs. This inflationary increase occurs despite the economy continuing to perform poorly and inflationary pressures having obviously subsided. Core inflation, on the other hand, was unchanged at 2.3%, suggesting that the underlying price pressures have not dangerously accelerated.
While the general inflation rate ticked up in June compared to recent months, the story is a bit more complicated. Such is the case with our May services inflation rate, which was an outlier low reading. Since then, that rate has barely crawled upwards from 3.2% to 3.3%. At the same time, inflation for goods slipped a little further down to 0.6% to 0.5%, an indication of continued strain in the manufacturing sector. The surveys done since May reveal growing pessimism among goods producers about their expectations for selling prices. This move does not bode well for ongoing price appreciation in the years ahead.
Even with the recent inflation surge, real wage growth has dramatically declined in recent quarters. This decrease is alarming as it relates to consumer spending power and the economic wellbeing of working families. Analysts have long observed that weak economic underlying conditions can limit the extent to which inflation can sustainably increase. Never mind that at the same time, they’re witnessing productivity starting to significantly rebound.
The European Central Bank (ECB) was once thought to have adopted a hard 2% inflation target. Positive trends—including, we hope, the return of productivity—indicate that this is an attainable target. As the central bank considers how to move monetary policy going forward, it does so in an increasingly complicated environment. With weak wage growth, the economy does not appear to have the strong underlying thrust. If things don’t pick up, we’d expect another cut this fall.
Looking at the consumer spending behaviour category, the drop in package holiday prices in May was influenced by there being fewer public holidays. These rents were probably saved by June to an extent, as the summer revival in travel demand started hitting in earnest during the warmer months. The ambiguity in holiday prices as these are included in the services overall inflation. Despite the favorable pull of seasonal effects, this inflation has found it hard to take hold.
Looking forward, economists predict that inflation will return to something closer to 3% by the end of the year. This forecast reflects a tempered sense of optimism regarding the direction of the long economic recovery. We understand that the current indicators are not yet pointing to a clear and robust recovery. The ECB continues to closely track these developments. As such, its decisions will be decisive in determining whether the eurozone’s economic future is one of punishment or prosperity.