Core inflation too high for ECB to stop hiking

April’s inflation data provided little sign that underlying price pressures are easing. Admittedly, the core rate edged down from 5.7% y/y in March to 5.6%, which was the first decline in 15 months. But that was entirely due to a decline in core goods inflation, reflecting the significant easing of global supply-chain disruption and perhaps some pass-through from lower energy prices. By contrast, services inflation – which is more closely tied to conditions in the domestic economy – rose again to a new record high. What’s more, even though core inflation was slightly lower in year-on-year terms, the month-on-month core inflation rate jumped from 0.4% to 0.6%. Services inflation was 0.8% m/m, or 10% in annualised terms. With a range of data showing that the labour market remains tight, and that the demand for labour has if anything strengthened in recent months, we expect wage growth and services inflation to stay very high this year. This should keep core inflation above 2% and encourage the ECB to raise interest rates a couple more times, most likely taking the deposit rate to a peak of 3.75%.