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The inflation of services in the countries of the North further distances the reduction of ECB rates

Date: March 1, 2024 Time: 06:31:38

The photograph left by the indicators published this week by Eurostat, the community statistics office, confirms two ideas: the eurozone economy is holding up against all odds – it has remained positive with a slight advance of 0, 1% despite the financial turbulence, the increase in financing costs or the rise in prices- and the inflation data once again indicates more persistent and deeper tensions than what the main organizations had anticipated. The CPI annual rate rose one tenth last month to 7%, while the underlying rate barely moderated to 5.6%, which is why it remains at problematic levels for the European Central Bank (ECB).

Together with those of food (+13.5%), the prices of services (+5.2%) have been the ones that have pushed up the shopping basket the most in the last month in the group of countries that share currency. However, this last variable – linked for a very long time to the evolution of wages – is not behaving in the same way throughout the territory. This service inflation is well above the average in Austria, Belgium and the Netherlands, compared to the relative moderation observed in the southern European states. In Germany, another of the partners of the most orthodox line, its public sector has negotiated salary increases for two years equivalent to 5% per year and the Minimum Interprofessional Salary (SMI) rose from last October from 9.8 to 12 euros .

The problem with inflationary tensions persisting in the North is that the ECB may choose to continue raising rates after this summer, warns Gilles Moëc, chief economist at AXA Investment Managers. In his opinion, this could create “some political friction.” Moëc suspects that this divergence in price dynamics may be due to the fact that the countries of the Mediterranean arc, especially hit by the financial and debt crisis, have well internalized “price moderation” after a long decade of definitions and sacrifices. In his opinion, this long period may have formed a “habitus” in pricing that, even in the recent period of disturbances, “may have convinced producers and retailers to proceed with caution in the transmission of input costs to the final prices”, he points out.

The European Commission had estimated that the “persistent” pressure from food and service prices would be felt especially in the first half of this year, a scenario that seems less and less obvious. In the Spanish case, the annual rate of the harmonized CPI -which is the reference taken in Europe to be able to make the comparison between countries- also remains among the lowest in April, when it stood at 3.8%. The general inflation rate accelerated in the country to 4.1% from the 3.3% it reached in March, highlighted by the inverse base effect seen in energy. Funcas, among other organizations, had already been warning that for the remainder of the year Spain would be affected by an inflammation of saw teeth precisely for this reason.

Rising financing costs are already having repercussions

A scenario of rising rates for a longer period in the euro zone could further cloud the economic horizon for the region. The sharp increase in financing costs is reflected in stricter rules for granting bank loans, as the recently published ECB Bank Lending Survey has shown. However, it is not just the supply of credit that is under pressure. Business demand for loans, mortgage financing and consumer credit are also declining. “This is another aspect that will be reflected in the weakening of economic activity in the coming quarters,” warns Philipp E. Bärtschi, CFA, Chief Investment Officer at J. Safra Sarasin Sustainable AM.

Faced with a scenario of this type, in which the credit contraction continues its course, the risk to company margins is relevant, in the opinion of François Rimeu, senior strategist at La Française AM. “Since we are at the end of the cycle, the risk of a financial crash is still present and the consequences of the banking crisis are still not clear,” the expert points out. After the last meeting of the Governing Council of the ECB (in which the issuer raised the reference rates to 3.75%), President Lagarde insisted that inflation is still too high and that wage pressure has strengthened, due to what are necessary new rises in the price of money. Experts foresee, in principle, an increase of another 0.25 basis points on June 15.

It will not be the only one, and in a period in which European fiscal policy will continue to be “lax” throughout this decade, especially due to the promotion of the Nex Generation EU Funds, equilibrium interest rates (those that place growth of the economy at its potential and, at the same time, stabilize the behavior of prices) will be higher and inflation will continue to put pressure on consumers’ pockets. This is the main conclusion outlined this week in a report to investors by the American Goldman Sachs, the world’s largest investment bank.

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Puck Henry
Puck Henry
Puck Henry is an editor for ePrimefeed covering all types of news.
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