Producer Price Fall and Stickier Services Inflation: Impact on CPI and Resilient Consumption
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The fall in producer prices will bring goods disinflation down the line in CPI
The flipside of industrial weakness is a sharp deceleration in producer price dynamics. Courtesy of declining energy prices, PPI inflation entered negative territory in April,
anticipating further decelerations down the line in the goods component of headline inflation.
Services inflation is proving relatively stickier, though, possibly reflecting in part a re- composition of consumption patterns out of interest rate-sensitive durable goods into services as part of the last bout of the re-opening effect. With administrative initiatives on energy bills still in place at least until the end of the summer, and with big energy base effects yet to play out, the CPI disinflation profile is still exposed to temporary jumps, but the direction seems unambiguously set.
Stickier services inflation to slow the decline in core inflation
Resilient labour market to continue to support consumption
A declining inflation environment will likely coexist with a resilient employment environment, at least in the short term. Labour market data continue to point to residual job creation, with a prevalence of open-ended contracts over temporary ones. This is clearly helping to support consumer confidence and keep concerns about future unemployment at low levels.
Unfavourable demographics and supply-demand mismatches could keep some pressure on wages, at least in certain sectors. For the time being, the impact on aggregate hourly wages has been limited (in May it was up by 2.4% year-on-year), but we can’t rule out it inching up to the 3% area towards the end of the year.
All in all, the combined effect of decelerating inflation, resilient employment and slowly accelerating wages should continue to support real disposable income, ultimately creating room for decent consumption growth in 2023.
