Underlying inflation has 'likely peaked' already — ECB

ECB chief economist Philip Lane said bank was confident falling energy prices would bring down costs across the economy

ECB chief economist Philip Lane is confident that price pressures in the eurozone 'should come down quite a lot later this year'. 

Underlying inflation probably peaked during the first half of this year, according to the European Central Bank (ECB), but there remains a “high degree of uncertainty” as to the actual levels.

With external pressures leading to rising inflation beginning to soften, the ECB is starting to turn its attention to domestic inflationary forces which are becoming more prominent.

In an analysis of underlying inflation, the ECB said while underlying inflation remains “high overall”, data suggests it “likely peaked” in the first half of this year. The observed trend is “broadly in line” with its June projections, the analysis said.

Underlying inflation is the measure of inflation that would be expected in the absence of economic or supply shocks.

Speaking on the ECB’s podcast, ECB chief economist Philip Lane said the bank was confident falling energy prices would bring down costs across the economy but on the other hand, domestic inflation is becoming more of a concern.

“What's happening this year is the high inflation we saw last year is basically pushing up wages this year. So what we say is that domestic components of inflation are coming from rising wages and also firms looking to rebuild profits are pushing up underlying inflation,” he said.

Mr Lane was confident price pressures in the eurozone “should come down quite a lot later this year". 

Decline in services inflation

The ECB added a decline in services inflation “appears to have started”.

The ECB said given the easing of supply bottlenecks, goods inflation is less likely to be persistent, whereas the “dynamics of services inflation may determine the overall persistence of headline inflation”.

The ECB is not due to meet again to discuss the potential for further interest rate hikes until September 14. Since July last year, interest rates have already risen by 4.25%.

Annual inflation in the eurozone was running at 5.3% during the month of July, which is well above the ECB’s medium-term target of 2%.

Recent flash estimates by the Central Statistics Office suggest annual inflation in Ireland dropped to 4.6% during July.

Whether or not another increase in interest rates will come during the September meeting — or at the two other meetings scheduled before the end of the year — will depend on economic and financial data, underlying inflation dynamics and the effectiveness of tightening monetary policy.

ECB president Christine Lagarde has said inflation is still expected to be too high for too long and that interest rates will be set at “sufficiently restrictive levels for as long as necessary”.

The ECB said the surge in inflation since 2021 has been the product of extraordinary relative price shocks related to the post-pandemic recovery, supply bottlenecks and the rise in energy prices linked in part to Russia’s war against Ukraine.

"In this context, standard measures of underlying inflation may contain a sizeable ‘reverting’ component that can be expected to fade out over the medium term,” the ECB said.