The monetary tightening by the Federal Reserve and the ECB has led to a decline of the business climate in the manufacturing sector. The services sector has been resilient thus far. This may reflect the diversity of the subsectors within services, with some being highly correlated with the manufacturing sector and others far less so. Services also tend to be less sensitive to interest rates, which implies a more limited impact of central bank rate hikes. This resilience also influences the evolution of inflation. Services have a high labour intensity and wage developments are a key driver of services inflation, far more than in manufacturing. This complicates the task of central banks in bringing inflation under control.
