The euro area faces a slower path for inflation in the coming months, with easing price pressures helped by tighter monetary policy. This perspective comes from the governor of the Bank of Spain, Pablo Hernandez de Cos, who oversees Spain’s central bank and participates in ECB discussions.
He noted that recent inflation data and its main drivers in the euro area are somewhat encouraging, yet the overall situation warrants caution, a view he shared ahead of a meeting of business leaders and policymakers.
Despite a visible slowdown, inflation rose to 5.9% in January, aided by a VAT cut on food
At the February gathering, De Cos highlighted that the ECB Governing Council has taken into account the slowdown in price increases, the sharp fall in gas prices, easing supply-chain bottlenecks, the euro’s appreciation, and tighter financial conditions. He stated that inflation is likely to fall more quickly in the coming months than previously anticipated in December.
Core inflation
He warned that even if gas prices near pre-war levels in Ukraine, upside risks to core inflation could retain pressure in the short term.
De Cos also argued that fiscal measures introduced by governments to cushion inflation could have offsetting effects when withdrawn, potentially extending the inflationary period. This contributed to the ECB’s revised outlook, with the 2024 inflation forecast for the euro area set at 3.4%.
Additionally, he noted that some measures are price ceilings whose impact depends on energy-cost developments. With lower energy prices, ceilings may cease to apply, reducing the negative effects this year and diminishing the upside impact of their reversal in 2024.
The Bank of Spain chief also pointed to the role of the euro exchange rate in shaping inflation. In the first half of 2022 the weaker euro contributed to higher prices against the dollar, while the latter part of 2022 and early 2023 saw the trend reverse.
Wages
On wages, De Cos warned that there could be a renewed push to restore lost purchasing power for workers, especially as wage talks unfold within a tight labor market where unemployment remains at a record low of 6.6%. The sense of labor shortages among firms remains unusually high, influencing wage dynamics.
He emphasized the need to monitor wage developments and margins to gauge how they might affect future inflation trajectories.
Looking ahead, the reopening of China’s economy adds another layer of uncertainty for inflation, given its potential to boost demand and influence supply chains. Yet it also shows that problems in global supply chains can be alleviated more quickly when the Asian giant strengthens consumption.
As a result, De Cos noted that during the February ECB Governing Council meeting an agreement was reached to raise interest rates by 50 basis points, with a similar pace anticipated in March as data are reviewed to determine policy options. In March, the ECB will publish a fresh macroeconomic forecast, including a comprehensive reassessment of the euro area’s inflation outlook, to guide a data-driven response across the currency union.