Pockets of inflation in a low inflation world

Despite an increase in June, core inflation in the eurozone remains stubbornly low. The dispersion is significant between countries and between the expenditure components of the price index. Inflation is low for clothing and footwear, furnishings and household equipment, transport and communications. It is higher for housing-related items, restaurants and hotels, miscellaneous goods and services and recreation and culture. Non-energy industrial goods price inflation is very low. Should this continue, it would imply that the acceleration of inflation which is the ECB is pursuing by renewed policy easing, has to come from services. However, research shows that it takes more time for services prices to respond to monetary policy and economic activity. Monetary accomodation is here to stay.

The dispersion is also considerable when looking at the expenditure items per country. The highlighted cells in chart 2 show inflation higher than 1.5%. In most countries, inflation is low for clothing and footwear, furnishings and household equipment[i], transport and communications. The picture on education is mixed, but it only represents 1% of HICP. Housing-related[ii] items, restaurants and hotels, miscellaneous goods and services[iii] and, to a lesser extent, recreation and culture, have inflation of 1.5% or more, sometimes significantly so. Inflation well above average for restaurants, hotels, recreation and culture doesn’t come as a surprise at this point of the business cycle: a low unemployment rate, low interest rates and good growth in compensation support consumer spending, which creates room for companies to raise prices. Housing-related inflation is explained by higher energy bills and bottlenecks in the construction sector.

The charts also illustrate the challenges faced by the ECB. Food including alcohol and tobacco has a weight of 19% in HICP, energy 10%, so monetary policy tries to influence the remaining 71%. The weight of non-energy industrial goods is 26.4%, but for structural reasons goods price inflation remains stubbornly low. Moreover, a slowing economy and persistently high uncertainty restrain the eagerness of companies to raise prices. This implies, for inflation to move closer to the ECB’s target on a lasting basis, services inflation needs to accelerate further from an already satisfactory level. Against this background, Benoît Coeuré’s comment in a recent speech[iv] that “prices in the services sector change much less frequently than in other sectors and are less sensitive to exchange rates” which implies that “it takes longer for inflation to respond to changes in monetary policy and economic activity than it did a few decades ago” reminds us that patience will be necessary. Monetary accommodation is here to stay.

[i] This concerns items such as household furniture, lighting equipment, carpets, repair of furniture, household textiles, household appliances, cleaning and maintenance products, domestic services, etc.

[ii] Items consist of actual rentals for housing, maintenance and repair of the dwelling, services of plumbers, electricians, painters, carpenters, cost of water, electricity and gas supply, etc.

[iii] This covers personal care, jewellery, social protection, insurance, charges by banks and post offices, legal services and accountancy, etc.

[iv] The rise of services and the transmission of monetary policy, Speech by Benoît Cœuré, Member of the Executive Board of the ECB, at the 21st Geneva Conference on the World Economy, 16 May 2019