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Overall price growth accelerated to 7.0% in April from 6.9% a
month earlier, as rising services and energy costs offset a
slowdown in food price growth.
Although underlying price growth, the key focus of European
Central Bank policymakers in recent months, slowed a touch, the
crucial services component continued to accelerate, pointing to
mounting wage pressures that could get inflation stuck above the
ECB's 2% target.
Excluding volatile food and fuel prices, core inflation slowed
to 7.3% from 7.5%, while an even narrower measure, which
excludes alcohol and tobacco, slowed to 5.6% from 5.7% in its
first decline since last June.
Inflation has been above the ECB's 2% target for nearly two
years and the bank has lifted interest rates by a combined 375
basis points since last July to arrest runaway price growth.
But more hikes are likely as it could be 2025 before inflation
is back at target and the "last mile" of disinflation, getting
from 3% to 2%, could be especially difficult, taking nearly 2
years.
Services inflation, which is primarily driven by labour costs,
accelerated to 5.2% from 5.1%, confirming policymaker fears that
nominal wage growth could become dangerously fast.
Wages are still down in real terms given rapid inflation but low
unemployment and growing labour scarcity, especially in
services, is driving up nominal wages.
The ECB has long said that nominal wage growth of 3% would be
consistent with its inflation target but this year's rise could
be twice as fast.
Unexpectedly generous wage deals in Germany, the bloc's biggest
economy, also raise the risk that labour costs could continue to
rise especially quickly next year, prolonging inflation.
Markets see the ECB's 3.25% deposit rate rising to just below
3.75% this summer but some policymakers have already warned that
this may not be enough.
Consumer and market based inflation expectations have both risen
in recent months even as energy costs fall, suggesting that
inflation is now more embedded than earlier, driven primarily by
wages, services and domestic demand.
The ECB will next meet on June 15 and has essentially promised
another rate hike then.
(Reporting by Balazs Koranyi; Editing by Bernadette Baum)
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