(Bloomberg) -- The European Central Bank is closely watching stubborn price growth in the services sector to make sure it doesn’t derail the return to the 2% goal, Executive Board member Isabel Schnabel told Frankfurter Allgemeine Zeitung.
Officials are still facing a difficult last mile in their fight against inflation because of the risk that wage growth remains elevated for longer, the German policymaker was quoted as saying. That could happen if pay boosts were to be driven by tightness in the labor market instead of just catching up with inflation, she said.
“But a part of inflation, emanating especially from the services sector, is proving to be particularly persistent,” according to Schnabel. “A repeated surprise in services inflation is at least a reason for taking a closer look.”
The ECB left interest interest rates on hold this month after a first reduction in June, and officials didn’t give any indication on what will happen next. President Christine Lagarde said the outcome of the September gathering is “wide open,” a sentiment that was echoed by Schnabel.
“There were some data that were not fully in line with the projections. That is why we need to remain vigilant,” she said. “A first rate cut hence does not automatically result in a whole series of further cuts.”
“The pace of rate cuts will depend on the data,” she added. “The same can be said for how far interest rates can be cut overall – this is also uncertain at present.”
Services inflation, where labor costs play a relatively important role, remained stuck at 4.1% last month — and a new reading is due next week. Schnabel said that while lower price increases for goods have so far provided a buffer, there’s no guarantee that this will stay this way.
“For example, we see that freight costs have increased significantly and there is a threat of rising protectionism,” she said. “Both factors could push up goods price inflation.”
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