Euro Area Core Inflation (HICP, excl. energy and food)

Core HICP captures price changes across all goods and services consumed by households in the euro area, but deliberately removes energy and unprocessed food to filter out transitory shocks. Services constitute the largest component, representing roughly seventy percent of the index, followed by non-energy industrial goods, processed food, and other regulated prices. The measure is compiled by national statistical offices and harmonised across euro area member states to ensure comparability.

• •Excludes energy and unprocessed food due to their price volatility
• •Services account for approximately seventy percent of the index weight
• •The ECB monitors this measure more closely than headline inflation for monetary policy decisions

Wage growth stands as the most significant driver, as labor costs represent the dominant share of business expenses across the services-dominated euro area economy. Services inflation tends to be stickier than goods inflation because it is less exposed to global competition and more sensitive to domestic economic conditions and wage dynamics. Inflation expectations among businesses and households also matter, as they influence pricing behavior and wage negotiations, while productivity gains can offset cost pressures if they outpace compensation growth.

• •Wage growth and labor market tightness are primary transmission channels
• •Services inflation exhibits greater persistence due to limited international competition
• •Productivity trends moderate or amplify underlying price pressures depending on their pace relative to wages

Core inflation surged during 2022 as pandemic-era supply disruptions, pent-up demand, and higher energy costs fed through into broader prices, peaking well above five percent. It has since decelerated steadily as monetary policy tightened, energy prices normalized, and supply chains healed, converging toward the two percent target by late 2024 and early 2025. Services inflation has proven notably stubborn, declining more slowly than goods inflation as wage growth remained elevated and domestic demand stayed resilient.

• •Reached elevated levels in 2022 due to supply bottlenecks and energy passthrough effects
• •Decelerated through 2023 and 2024 as restrictive monetary policy took effect
• •Services components have moderated more gradually than non-energy industrial goods

On the demand side, robust consumer spending, supported by wage gains and a relatively resilient labor market, has sustained price pressures in domestically-oriented sectors like hospitality and personal services. On the supply side, productivity performance has been disappointing across much of the euro area, limiting the capacity for non-inflationary growth and allowing cost pressures to translate into higher prices. Global trade conditions and import prices for non-energy goods have provided some offsetting disinflationary influence, particularly as shipping costs normalized and currency movements affected import values.

• •Domestic demand strength in services has sustained pricing power for businesses facing labor shortages
• •Weak productivity growth has prevented unit labor costs from falling as needed
• •Import price dynamics for non-energy goods have contributed to disinflation as global conditions improved

Most projections suggest core inflation will continue approaching the two percent target as restrictive monetary policy filters through the economy, wage growth decelerates, and productivity improves modestly. The services sector remains the key uncertainty, with its inflation rate still above target and dependent on whether labor markets soften sufficiently to ease wage pressures. Risks are tilted moderately to the upside from potential second-round effects on wages and from geopolitical disruptions that could affect energy costs and supply chains, though base effects from prior sharp increases should continue to mechanically lower year-on-year readings.

• •Projections indicate continued convergence toward two percent over the coming quarters
• •Services inflation persistence represents the main upside risk to the disinflation path
• •Base effects from 2022's inflation spike will mechanically support further disinflation in 2025