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Euroland: inflation drops but for the ECB it is not enough

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Euroland: inflation drops but for the ECB it is not enough

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It dropped, but less than expected. February’s inflation was a small disappointment for the “doves” of the European Central Bank. Together with other data it seems to confirm the idea that the “last kilometre”, from here to the 2% objective – to be achieved in a sustainable way – is truly a bumpy road, which will be traveled very slowly.

Inflation higher than expected

The numbers speak clearly. Overall inflation was 2.6%, from 2.8% in January, thanks above all to a decline in energy prices (-3.7%) which is above all an arithmetic effect: the monthly increase was sensitive, and equal to 1.5 percent. Analysts had expected 2.5% annually. Core inflation, which excludes prices that cannot be controlled by monetary policy, was 3.1%, up from 3.3% in January. Expectations were for 2.9 percent.

The surprise of the services

What really surprised us, however, were the services. Inflation in the sector fell to 3.9% annually, after being stuck at 4% for three consecutive months. In the month of February alone, however, prices – which are the stickiest, and most linked to the internal conditions of the economy – rose by 0.8%. It’s a lot. If, hypothetically, inflation rose at the same rate not for one month, but for twelve, annual inflation would rise to 9.6%.

An overheated sector

It’s not likely. However, if, as is more correct to calculate, the inflation of services in the last three months continued at the same rate for twelve, the services sub-index would return to 5.8 percent per year at the end of the period. Enough to advise caution. It is true that the inflation of manufacturing goods – generally exposed to international competition – is now at 1.6%, from 2%, but this is not the inflammation that monetary policy now wants to cure.

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The game of wages and profit margins

The European Central Bank needs to see inflation truly under control not only in the overall data, but also in the “underlying” ones. President Christine Lagarde and chief economist Philip Lane invite us to look – as well as expectations – at wages and profit margins which in these phases, if they move in tandem, can support inflation. The ECB has developed a wage tracker to identify “turning points”, which however are not on the horizon. More simply, the classic index of negotiated wages, very important in the Euroland, still indicated, at the end of 2023, an annual increase of 4.5%.

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