Food prices do not let up and put more pressure on the ECB

Prices in the Eurozone are 5.5% higher than a year ago, a general increase that is no longer only conditioned by the most volatile elements of the consumer basket (energy products and fresh food), since core inflation -which measures the price evolution of all the other goods and services we consume, and is determined above all by processed foods- stood at 6.8% in June, according to data published this Wednesday by Eurostat.

Although the general indicator has moderated six tenths to 5.5% -from the 6.1% it registered in May-, the problem is that the underlying indicator is still very high and only moderated one tenth last month, from 6.9% to 6.8%, an alarming level, given that this indicator measures trend inflation in the economy and serves to intuit how long it will take for prices to fall.

Given that this indicator has not given signs of relief, but rather the opposite, the market takes it for granted that the European Central Bank (ECB) at its next monetary policy meeting next week -on Thursday, July 27- will approve a new quarter-point increase in interest rates, up to 3.75%, a strategy that seeks to tighten financing conditions for families and companies, which will have to tighten their belts, cut consumption and investment, thus cooling the economy and forcing suppliers of goods and services to lower prices. prices.

Its objective is none other than to bring inflation back to healthy ground, that is, around 2%, a level that has not been recorded in the EU since May 2021.

The problem is that the interest rate increases that the ECB has carried out to date have not yet been effective in containing the increase in prices.. On the one hand, due to the time lag: it takes some time from when monetary policy tightens until it has an impact on the behavior of economic agents and, on the other, because the fiscal policy of the EU member countries is acting in the opposite direction, expansively, which contributes to rising inflation.

Another key factor that is making it difficult for inflation to fall is the labor market.. “The labor market remains active, which is a key concern for the ECB. While there are tentative initial signs of cooling off (think vacancy rates have passed their peak), unemployment held steady at a record low of 6.5% in May.. For the ECB, this means that the risk of prolonged wage growth remains, which is an important reason why the ECB is not pausing its hike cycle yet,” explained Bert Colijn, Eurozone economist at ING, who expects not only a rate hike in July (up to 3.75%) but also in September (up to 4%).

In Spain, headline inflation has moderated to reach 1.9% in June -its minimum for the year, predictably-, but core inflation remains at 5.9%. Although in our case the CPI is already rising below 2%, given that the monetary policy is community, we will have to wait for the whole Union to reach reasonable levels of inflation to see how the ECB takes its foot off the accelerator.

In addition, it must be taken into account that this decrease registered in the month of June will be reversed soon, since it is due to the 'step effect' of comparing with a month of June of last year in which prices rose strongly. Funcas experts expect new increases in the coming months and calculate that general inflation will once again be at levels close to 5% in December.