Inflation is falling again in the eurozone. Price increases reached 2.5% in June over a year, compared to 2.6% the previous month. Nothing spectacular, then. Inflation is only gradually approaching the European Central Bank’s (ECB) target of 2% in the medium term.
Of the twenty countries in the eurozone, six have inflation below 2%, including Italy and Finland, and seven have price increases above 3%, with Belgium, where wages are indexed to inflation, being the country with the highest inflation on the continent.
Energy prices are no longer enough to slow inflation, food prices very little. With the sharp rise in 2022 and the decline last year, inflation is falling much less quickly. As economists say in their jargon, it is the last mile – that is, going from 3% to 2% – that is the hardest to do.
+4.1% for services
As proof, the price of services, which account for almost half of European household consumption, is not falling. It continues to increase by 4.1% in June over the last twelve months. Because this is defined by wage increases, wage costs being significant for service companies. However, wages are rising, and even faster than prices.
In the eurozone, they increased by 4.7% in the first quarter of 2024 compared to the same period of the previous year. Moreover, unemployment remained at its lowest levels in the eurozone in June, affecting 6.4% of the population. As many companies still say they are experiencing recruitment difficulties, it seems that the negotiating capacity of existing employees remains relatively strong.
Inflation zone euro” The echoes “
All of this should prompt the ECB to err on the side of caution at its next policy meeting on July 18. While rates were cut by 0.25% in June, they are unlikely to be cut again, with ECB President Christine Lagarde repeatedly indicating that the central bank still needs data showing that prices and wages are calming down.
One of the determinants of future price developments in the eurozone will be corporate margins. These have risen during the inflationary period, as companies took advantage of the fog around prices and excess savings from lockdowns to raise their selling prices. Margins are now starting to decline. You cannot have wage increases above inflation, margins that fall very little and inflation that returns to 2%, all with zero productivity gains. Someone is going to have to make an effort.
