Rising services share behind slower euro zone inflation pick up: Coeure

Written by on May 16, 2019

FILE PHOTO: Benoit Coeure, board member of the European Central Bank (ECB), is photographed during an interview with Reuters journalists at the ECB headquarters in Frankfurt
FILE PHOTO: Benoit Coeure, board member of the European Central Bank (ECB), is photographed during an interview with Reuters journalists at the ECB headquarters in Frankfurt, Germany, May 17, 2017. Picture taken May 17, 2017. REUTERS/Kai Pfaffenbach/File Photo

May 16, 2019

GENEVA (Reuters) – The growing share of the services sector in the euro zone economy may explain why inflation is picking up unexpectedly slow, despite years of unprecedented stimulus, European Central Bank board member Benoit Coeure said on Thursday.

The ECB has deployed a complete arsenal of regular and unconventional tools to lift inflation but price growth has missed the ECB’s target of almost 2 percent since 2013, puzzling economists and leading some to even questioning whether monetary policy remains effective.

Coeure argued that services prices are inherently more rigid, partly due to weaker international competition and wage rigidity, suggesting that easy monetary policy will take longer to filter through.

“Services deepening implies that monetary policy takes more time to be transmitted to inflation, but its effectiveness has not diminished,” Coeure said in Geneva. “The effects of monetary policy take longer to pass through the economy but they have not become less powerful.”

Wages account for around 40% of input costs in services, compared with 20% in the manufacturing sector and wages in sectors such as education, healthcare or restaurants tend to be rigid.

“But in the medium term, as more and more firms readjust their prices as economic conditions improve, inflation will respond more forcefully,” Coeure added.

The bloc has created more than 10 million jobs since the worst of its crisis years and wages are rising relatively quickly. However, services margins are relatively high so firms have been accepting a profit squeeze rather than pass on higher costs.

The ECB has kept interest rates in negative territory and may ease policy further before it begins to tighten as inflation expectations are slipping amid a global growth slowdown.

Coeure added that there was also a transformation within the services sector, which pointed to a slowdown in inflation growth, adding to the delay in the pick-up long anticipated by the ECB.

(Reporting by Tom Miles; Writing by Balazs Koranyi; Editing by Toby Chopra)

Source: OANN

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