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Services price inflation is likely to remain stubbornly strong this year and could cause central banks to delay interest rate cuts, according to the Bank for International Settlements.
Prices in the services sector, which is labour-intensive and therefore more sensitive to movements in wages, are likely to remain high across advanced and emerging economies for longer than expected due to tight labour markets, said a report by the umbrella group for central banks.
If services prices increased further, the “possible slowdown of disinflation could prompt monetary policy to remain tighter for longer”, the report added.
Persistent growth in services inflation has proven to be an obstacle to addressing the “last mile” of inflation, as central bankers inch closer to an overall rate of price growth where they could begin making cuts.
“The basic fact is that service prices tend to be stickier,” said Hyun Song Shin, economic adviser and head of research at the BIS. “If services prices were to catch up to their previous trend, that could make that stickiness even more severe, further delaying interest rate cuts.”
Services prices have stayed high even as the cost of food and energy has come down in the eurozone and other major economies since Russia’s invasion of Ukraine and the lifting of Covid-19 restrictions unleashed the biggest surge in consumer prices for a generation.
The rate of services price growth increased in the UK to 6.5 per cent in January and declined at a slower pace than overall inflation in the US in January and the eurozone in February. Core inflation, which strips out the costs of food and energy, fell or remained the same across all three economies in the same time period.
“In the early stages of [the most recent spike in] inflation, wages did go up, but not as much as overall inflation. Now there is a catch-up effect where wages are continuing to go up as other prices have been moderating,” said Mark Gertler, professor of economics at New York University.
Monetary policymakers have pointed to wage pressures and the resulting persistent services inflation as a big challenge for bringing overall price growth closer to their targets.
“Wage growth is expected to become an increasingly important driver of inflation dynamics in the coming quarters,” said European Central Bank president Christine Lagarde in a speech to the European parliament last week.
Some economists have warned that services inflation has been further propped up by unexpectedly high consumer demand for services and therefore may take longer to respond to disinflationary pressures.
“Revenge spending has taken hold,” said Kevin Loane, chief US economist at Fathom Consulting, referring to resilient demand for services despite high interest rates. “Because of the build-up of savings in Europe and higher incomes in the US, we are not seeing a huge hit to services demand.”
Source: Economy - ft.com
