EZ HICP and Labor Market Preview (Jun 3): Headline Back Below Target as Services Inflation Reverses Easter Effect?
Exceeding expectations, EZ HICP inflation failed to fall in April, instead staying at 2.2%. More notably, services inflation jumped 0.5 ppt to 4.0%, very probably due to the impact of the timing of Easter affecting airfares and holiday costs. As already seen in flash French May numbers, and as was the case when this Easter effect last happened in 2019, services inflation is very likely to at least reverse that rise in May, this also likely to unwind the higher April flash core reading of 2.7%, ie which was up from 2.4%. Indeed, as a result, we see the headline rate dropping to a below-target and eight-month low of 1.9% helped by rounding and a further m/m fall in fuel prices.
Figure 1: Headline to Fall Below Target as Services Rise Reverses?
Source: Eurostat, CE, ECB
Easter effects may have been behind the jump in April unprocessed food inflation too, also likely to reverse in May. That April services data may have caused some prevarication within the ECB but the expected June rate cut still looks on the cards unless the May flash HICP (due 2 days before the June 5 verdict) surprises on the upside – however, some hawks may still cite the recent pick-up in supercore and PICC inflation as a cause for concern. NB it is notable that already-released French HICP data showed services inflation down to fresh cycle low of 2.1% in May!
Figure 2: Workforce Continues to Grow – Older Entrants the New Factor?
Source: Eurostat, CE, dashed lines are pre-pandemic trends
Regardless, the last HICP data arrived alongside March labor market numbers which showed a revision up from what was previously a new record-low jobless rate. Indeed, the data showed the largest jump in actual joblessness in the cycle despite the rate being stable at 6.2%, although this may rise in the April numbers due on June 3 too. Regardless, the low jobless rate comes alongside a continued and above-trend increase in the workforce, this possibly being a major factor in the manner in EZ wage inflation has been falling. What is notable, is that the pick-up in the workforce has shifted away from younger entrants (ie 25 and under) to older members (Figure 2), the question being whether this is being driven by a need to repair/boost ailing spending power.
Notably, the softer services message we envisage in the May data will not be evident in shorter-term price momentum data where 3-mth averages will still encompass the April surge at least for the time being. Even so, short-term core inflation has slowed and is running around target (Figure 3).
Figure 3: Core Inflation Already Around Target in Shorter-Term Dynamics?
Source: Eurostat ECB, CE
As we have noted previously, there are some signs in retailing surveys suggesting disinflation may have stalled. But this may be of increasing secondary importance to most of the ECB Council as a) inflation is already consistent with target; b) cost pressures are under control and may indeed be easing when it comes to softening wage inflation possibly helped by a swelling workforce and c) a fresh and more demand driven disinflation could be triggered by what seems to be a weaker real economy backdrop that could also exacerbate financial stability risks and which risks being accentuated on the downside by a possible trade war. And it is the latter factor that seems to be driving policy now, this over and beyond any consideration of reaching a neutral policy setting.