Euro zone: The choice is between core inflation remaining high and corporate profit margins collapsing in 2024

Labour productivity will probably fail to pick up in 2024. With nominal per capita wages set to increase by around 4% over the year, unit labour costs will also increase by 4%. We have a choice of two scenarios: A sharp decline in core inflation (in February 2024, inflation excluding energy and unprocessed food was 3.3% year-on-year), with an inevitable fall in corporate profit margins to reconcile core inflation and rising unit labour costs; A fairly high level of core inflation persisting, enabling a moderate fall in profit margins. But if the assumptions of productivity gains and wage increases are correct, it will be impossible to avoid either continuing high inflation or a fall in profit margins.