The last bastion of inflation

Following the surprising CPI figure – a favourable 2.2% year-on-year, two-tenths more than the Eurozone average in harmonised terms – we are approaching the end of the inflationary episode that arose from the energy and supply crisis. This does not mean that inflation has disappeared (the underlying CPI is still at 2.7%), nor does it mean that the ECB is ready to completely undo the cycle of interest rate hikes. But everything points to the fact that the shock imported costs are on their last legs.

The shopping basket is starting to get cheaper as the fall in production costs is passed on to the entire food chain. Processed foods have been falling for at least four months and fresh products for two (pending the detailed CPI for August), so that inflation in this component is on track to converge towards the levels close to 2% that industrial goods had already reached. Electricity is showing great volatility, but no clear trend is detected. And fuel prices remain at affordable prices, immune for the moment to the supply cuts announced by the producing countries or to the transport disruptions in the Red Sea.

Expectations, the key variable in all inflationary processes, have not become unmoored as might have been feared. According to the European economic survey, companies anticipate a de-escalation of their sales prices over the next few months: the data is relevant since this indicator has proven to be a good predictor of the CPI. Salaries are also moderating, in light of the increases agreed in the most recent period. The adjustment of salaries at the beginning of the year, with a vigorous bonus of close to 5% in the first quarter, was due to compensation phenomena that do not seem to have been consolidated in collective agreements.

The concern now comes from services: in these sectors, inflation is proving more resilient, standing at around 3.5% in Spain and even accelerating above 4% in the eurozone as a whole. The boost does not come from production costs or from the shock not only because of the energy sector, but also because of the strength of demand, exacerbated by the lack of competition that characterises these sectors compared to the fierce pressure that the manufacturing industry is subjected to in international markets. Since 2019, the CPI for services has accumulated an increase of close to 18%, a rate that almost triples the inflation of non-energy industrial goods, the latter being also the most affected by the energy and supply crisis.

However, the ECB is expected to acknowledge the progress in the disinflation process and thus decide at its next meeting to further cut the price of money. Another argument in favour of easing the pressure is the weakness of the European economy, and particularly of investment, the component most sensitive to interest rates. Credit to companies is not taking off and consumers could be cautious after the summer, according to confidence indices.

But beware, the central bank will proceed gradually until disinflation takes hold in services. It will also want to test the impact of its decisions on financial markets that are closely interconnected with the moves of the Federal Reserve: in this respect, a rate cut on the other side of the Atlantic could smooth the way. In any case, the labour shortage that persists in some sectors in line with demographic change and the multiplication of customs barriers makes it unlikely that interest rates will end up where they were a few years ago. The monetary cycle, like globalisation, has entered a new era.

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