Eurozone Services Sector Inflation: New Declines Expected Below ECB Forecasts

Capital Economics analysts project that the Eurozone’s services sector will experience an acceleration in its deceleration of inflation over the coming months, with rates falling below the expectations held by the European Central Bank. This scenario contrasts with the monetary authorities’ plans and opens the door to potentially more expansionary policy decisions later this year.

Significant Shift in Recent Service Sector Data

Recent indicators confirm a change in the inflation dynamics. The inflation rate in the services sector dropped from 3.4% in December to 3.2% in January, according to data compiled by Jin10. This movement represents a significant turn compared to the upward trend observed from August to November, when prices showed upward pressure. The magnitude of this correction suggests that the inflation peak in services may already be behind us.

Wage Moderation and Signs of Economic Slowdown

What makes this shift particularly relevant is that it coincides with a weakening in wage growth, a key element for understanding cost dynamics in the services sector. Several leading indicators point in the same direction: an Eurozone economy that is losing momentum. This convergence of factors supports the expectation that the services sector will maintain its path of inflation moderation in the coming quarters.

Lower Core Inflation Projections Than ECB’s Target

Capital Economics analysts estimate that core inflation could fall below 2% in the second half of the year, while overall inflation would be below 1.5%. These figures are significantly lower than what the European Central Bank has in its baseline scenario. If these projections materialize, the services sector would play a central role in this downward trajectory, as it has historically been one of the most resilient components of inflation.

Implications for Monetary Policy

The eventual confirmation of these trends in the services sector would likely intensify pressure on the ECB to implement rate cuts sooner than currently anticipated. A less inflationary services sector would eliminate one of the main concerns that has kept the institution cautious, allowing for a clearer easing of monetary conditions in the Eurozone.