FRANKFURT (Reuters) – Euro zone inflation accelerated last month, Eurostat reported on Wednesday, confirming preliminary data pointing to increasingly stubborn price increases in the 20 countries that share the euro.
Headline price growth rose to 7.0% in April from 6.9% in the previous month, as rising utilities and energy costs offset slower utility price growth.
While core price growth, the focus of European Central Bank policymakers, slowed slightly in recent months, the key component of the services sector continued to accelerate, pointing to mounting pressures, with wages rising above the 2% target set by the ECB. Inflation could be contained.
Core inflation, excluding volatile food and fuel prices, slowed to 7.3% from 7.5%, while a tighter measure excluding alcohol and tobacco, slowed to 5.6% from 5.7% in its first decline since last June.
Inflation has been above the 2% target set by the ECB for nearly two years, which has raised interest rates by 375 basis points since last July to curb rapid price increases.
But more increases are likely, as inflation will not return to target until 2025, and moving from the “bottom” of deflation, 3% to 2%, may be particularly difficult, as it will take about 2 years.
Inflation in the services sector, driven mainly by labor costs, rose to 5.2% from 5.1%, confirming fears among currency leaders that modest wage growth could be dangerously accelerating.
Real wages continue to decline given the high inflation, but low unemployment and growing labor shortages, especially in services, are pushing up nominal wages.
The ECB has long said a modest wage increase of 3% would be in line with its inflation target, but this year’s increase could be twice as fast.
Unexpectedly generous wage deals in Germany, the bloc’s biggest economy, also raise the risk that labor costs will continue to rise particularly sharply next year, boosting inflation.
Markets expect the ECB’s 3.25% deposit rate to drop slightly from 3.75% this summer, but some policymakers have already warned it may not be enough.
Both consumer and market inflation expectations have risen in recent months despite a decline in energy costs, suggesting that inflation is now higher than previously thought, driven mainly by wages, services and internal demand.
The ECB will meet on June 15 and has promised to hike rates further.