and stability, the next monetary policy decisions must be consistent with the current macroeconomic picture. in this uncertain environment, any speculation on the exact timing of monetary easing would be a sterile exercise and disrespectful to the ecb governing council as a collegiate body. what should be discussed now are the conditions to start monetary easing, while avoiding risks to price stability and unnecessary damage to the real economy. the conditions for starting monetary policy normalization there are three conditions for starting monetary policy normalization. first, the disinflation process must be well under way. recent data suggest that progress towards price stability has been greater than many were expecting just a few months ago. inflation fell to 2. 8 per cent in january, 8 percentage points below its peak in 2022 ( figure a8 ). core inflation, which excludes food and energy, has also fallen rapidly. while varying in intensity, this decline was broad - based across all countries ( figure a9 ) and across a very large proportion of items in the consumption basket ( figure a10 ), including products that typically show more persistent price changes. second, the fall in inflation needs to be sustained. indicators of short - term and underlying inflation clearly point to ongoing disinflation. measures of inflation momentum – which are less influenced by past trends and reflect current developments more accurately – are consistently below annual inflation. these are also at low levels for both headline and core inflation, with similar trends for services and industrial goods ( figure 2 ). the decline in firms ’ and households ’ inflation expectations, as well as those of market participants, points in the same direction. the latter expect inflation figure 2 headline and core inflation in the euro area ( 12 - month percentage changes and annualized 3 - month percentage changes ) headline −2 −2 core services non−energy industrial goods −2 −2 12−month 3−month sources : based on ecb and eurostat data. ( 1 ) monthly data. 12 - month percentage changes and annualized 3 - month percentage changes, calculated using seasonally adjusted data. to return to around 2 per cent as early as this spring. subsequent downward revisions in the eurosystem ’ s projections also signal that disinflation is under way ( figure a11 ). another key element is the unwinding of the energy shock. specifically, gas prices are now close to their mid - 2021 level and below the technical assumption used in the latest eurosystem projections.

in firms ’ total production costs – which is the main driver of inflation22 ( figure 4 ) – has gradually fallen to zero, easing inflationary pressures. in line with these developments, firms do not expect total costs to accelerate in the coming months ( figure a18 ). considering only labour and intermediate goods as inputs of production, labour costs account for around 40 per cent of total costs in the economy as a whole. in perfect competition, prices are equal to total marginal costs ( see h. r. varian, ‘ microeconomic analysis ’, new york - london, norton, 1992 ). in monopolistic competition, firms apply a mark - up to total marginal costs ( see a. k. dixit and j. e. stiglitz, ‘ monopolistic competition and optimum product diversity ’, american economic review, 67, 3, 1977, pp. 297 - 308 ). figure 4 total unit cost, labour unit cost and headline inflation in the euro area ( percentage changes on year - earlier period ) −4 −4 −4 labour unit cost −4 total unit cost headline inflation sources : based on data from destatis, eurostat, insee and istat. ( 1 ) quarterly data. percentage changes compared with the year - earlier period. estimates based on the data for france, germany and italy. unit costs are calculated as the ratio of total costs to total output in real terms. the effects of stagnating total production costs are compounded by those of weak demand for goods and services, which makes firms less likely to pass on wage increases to prices, for fear of losing market share. therefore, a hypothetical increase in wage growth is currently highly unlikely to trigger a wage - price spiral. moreover, with inflationary pressures tilted to the downside and corporate profits high, some recovery in the purchasing power of wages, after the recent losses ( figure a19 ), is to be expected and will support consumption and the economic recovery. conflicts in the middle east also pose risks to inflation. however, maritime transport only accounts for a small share of total production costs. 23 here too, low demand and high inventories reduce the likelihood of higher transport costs being passed on to prices to a significant extent. nonetheless, it cannot be ruled out that the situation will worsen and that tensions will escalate, affecting the supply and prices of energy products. these developments will need to be monitored closely. transport costs account for around 1 per cent of