KOF Monetary Policy Communicator, September 2023

The Governing Council decided to raise the three key ECB interest rates by 25 basis points. The Council also considers that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the two per cent target.

While annual HICP inflation in the euro area has declined to 5.3% in July, it remained at the same level in August. Reason for the inflation decline interruption is that energy prices rose again in August. Food inflation remains high at 10%, whereas inflation excluding energy and food fell to 5.3% in August. Goods inflation further decreased to 5.0% in July and 4.8% in August, following better supply conditions, weaker demand, past reductions in energy prices and weaker prices pressures. Services inflation is still sustained at 5.5% by high wage growth and strong holiday as well as travel spending.

As far as the drivers of inflation are concerned, the labour cost contribution to domestic inflation increased in the second quarter. However, the profit margin contribution to inflation has fallen for the first time since the beginning of 2022. Domestic price pressures remain strong, while most measures of underlying inflation are starting to fall. Most measures of longer-term inflation expectations currently stand at around 2%, but some indicators have increased and thus should need to be monitored.