Eurozone consumer prices ease less than expected, core inflation remains elevated

Eurozone inflation dropped to 2.6% in February from 2.8% the previous month, missing expectations of 2.5%.
Core inflation, excluding volatile components like food and fuel, only slightly decreased to 3.1% from 3.3%, remaining above the ECB’s 2% target.

The European Central Bank has maintained its deposit rate at a record high of 4% since September.
There is widespread speculation about a potential shift in policy, with discussions centering around the timeline for rate cuts. The expectation is for policy easing sometime in mid-2024.

The ECB had initiated a rapid campaign of interest rate hikes from mid-2022 in response to inflation spiking above 10%.

Current data suggest that inflation is approaching the 2% target, and policymakers are now considering the timing of rate cuts.

Despite the overall dip in inflation, there are concerns about persistent underlying price pressures, particularly in the labor-intensive services sector.
The worry is focused on fast wage inflation, which could contribute to a rebound in prices.

Economic stagnation over six quarters has had some impact on the labor market, leading to a slight easing of wage pressures.
Unemployment remains at a record low, and there is a concern that labor costs could rise again when economic growth resumes.

The ECB is particularly focused on wage growth, anticipating an increase of more than 4.5% this year.

The central bank has a long-standing position that anything above 3% in wage growth is inconsistent with its inflation target.

New economic projections from the ECB, expected next week, are anticipated to show a faster return to the 2% inflation target.

In summary, the Eurozone is grappling with inflationary pressures, and the ECB is contemplating adjustments to its monetary policy to address these challenges. The focus remains on managing inflation while considering the complexities of the labor market and wage dynamics.