Services inflation was on the ECB’s worry-list when it kept rates unchanged for the third meeting in a row.
By Wolf Richter for WOLF STREET.
Services inflation in the 20 countries that use the euro accelerated for the third month in a row on a year-over-year basis, to 3.5% in November, the highest since April, and far above the prepandemic range between 1% and 2%, according to Eurostat’s preliminary inflation data released today (red line in the chart). The recent low point that it bounced off was in August at 3.1%. The drivers of this recent acceleration were non-housing services.
By contrast, housing services (blue line) have increased at a steady though high rate of about 3.2% year-over-year for the four months through October after decelerating in prior months (November is not available in the preliminary release today).
The shaded area indicates the pre-pandemic range. The services components of inflation remain far hotter than before the pandemic. Housing-related services include actual rents paid by tenants; services for the maintenance and repair of dwellings; insurance connected with the dwelling; refuse and sewage; repairs of household goods; and domestic and household services.
For the ECB, worries about this recalcitrant services inflation have colored its rate-decision announcements and Q&A, including at the most recent policy announcement on October 30, when it kept is policy rates unchanged for the third meeting in a row (deposit facility rate at 2.0%), with some members suggesting that no additional rate cuts may be needed.
What had caused overall CPI for the Eurozone to cool substantially between mid-2022 and October 2024, were the plunge in energy prices off the huge spike, the drop in durable goods prices that had surged during the pandemic, and the return to prepandemic rates of inflation in food prices.
Energy inflation was again negative, with prices dropping 0.5% year-over-year.
The CPI for energy – which tracks prices for gasoline, diesel, natural gas, electricity, heating oil, etc. – had spiked by 70% from December 2020 to October 2022, and then started giving up part of the spike and is now down 15% from the top. Energy prices remain very high compared to prepandemic times.
Overall CPI accelerated to 2.2% year-over-year, driven by services, even as the continued year-over-year decline in energy prices, essentially flat durable goods prices, and slower-rising food price pushed the other way (blue in the chart below).
Spiking energy prices and food prices in 2021 and 2022 had been big factors in the Euro Areas overall inflation spike at the time, powering the overall CPI to a 10.5% year-over-year increase by late 2022.
Now, with energy inflation negative, durable goods inflation close to zero, and food inflation low, overall CPI is close to the ECB’s target of 2%. The worrisome aspect is the persistence of services inflation, as energy prices aren’t going to drop forever, which could pull CPI further away from the ECB’s 2% target.
Core CPI – which excludes food, energy, tobacco, and alcohol products – rose by 2.41% in November, the biggest year-over-year increase since April, edging past the October increase of 2.37%. Core CPI is dominated by services.
The chart shows overall CPI (blue), core CPI (gold), and services CPI (red), along with the ECB’s target (black dotted line).
Food inflation rose by 1.9% year-over-year in October (November not available in the preliminary release). Price increases have slowed substantially after the 18% year-over-year spike into early 2023. Since March 2024, food prices have been rising from these very high levels at the prepandemic rate.
This cooling of food inflation off the massive spike in 2022 and early 2023 has contributed to the cooling of overall CPI.
Durable goods CPI rose by 0.1% year-over-year, so nearly unchanged in October (November not available in the preliminary release). After the 13% price spike from December 2020 through April 2023, prices have remained essentially unchanged to slightly down since then, remaining at very high levels.
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