##4 and 2. 3 % in 2025. the anatomy of inflation the drivers of inflation today are very different in type and magnitude from those in play before the pandemic as could be suspected in view of the recent unprecedentedly high inflation rates. energy prices have been the most important driver of both the previous surge and the current decline in inflation. recovering global demand drove the initial rise in commodity prices over the course of 2021. russia ’ s invasion of ukraine in early 2022 pushed up commodity prices further, leading to an energy inflation rate of 44. 3 % year on year in march 2022, unprecedented in euro area history. food inflation was also affected ; it reached a historic high of 15. 5 % in march of this year. these developments have hit lower income households particularly hard owing to the significant share of energy and food in their consumption basket. during the pandemic, the rotation of consumption away from services towards goods, combined with supply bottlenecks, resulted in severe demand - supply mismatches. this set in motion an inflationary impulse which pushed durable goods inflation to historically high levels. [ 5 ] more recently, goods inflation fell to 5. 5 % in june from its peak of 6. 8 % in february 2023. this reflects the easing of global supply shocks, as well as the impact of our monetary policy tightening on interest - sensitive components of demand, such as durable goods consumption. although services inflation eased slightly in may, it has been on an upward trajectory since mid - 2021, reaching 5. 4 % in june. [ 6 ] the persistence in services inflation reflects that some cost pressures and reopening effects are still passing through. at the same time, rising wages are adding inflationary pressure to labour - intensive services. the reopening of the economy after the pandemic resulted in a strong resurgence of pent - up demand for contact - intensive services in particular, such as restaurants and travel related - items. overall, the pass - through from the recent supply shocks to underlying prices has been faster and more widespread than before the pandemic. this likely reflects both the unprecedented size and duration of the shocks which, combined with economic dislocations and significant labour shortages, allowed firms to pass higher input costs on to consumers. in an attempt to rebuild purchasing power, workers continue to push for higher wages. given these unprecedented economic shocks, projecting key macroeconomic variables has proven challenging. this is particularly true for headline inflation, which has seen

significant forecast errors by major professional forecasters, central banks and policy institutions since the start of the pandemic. disentangling the “ signal ” on headline inflation from the “ noise ” has become increasingly difficult. underlying inflation measures have therefore become an important pillar in assessing the inflation outlook and risks. [ 9 ] these measures aim to capture more persistent price developments ( for instance, by excluding more volatile items from headline inflation ) to provide a clearer signal for medium - term inflation developments. however, a key challenge is that the standard set of measures of underlying inflation continue to be contaminated by past energy shocks, supply disruptions and reopening dynamics. since the start of the pandemic, the accuracy of both headline and core inflation projections one or two years ahead has in fact deteriorated significantly. each indicator has its advantages and disadvantages and the performance of different measures can change over time. it is therefore important to monitor a wide range of indicators of underlying inflation. that said, there are currently two clear messages. first, while underlying price pressures remain strong, most indicators have started to show some signs of softening. second, while still wide by historical standards, the range of measures of underlying inflation recently began to narrow. this suggests that the unusually high level of uncertainty around the downward trajectory of inflation over the medium term has started to ease somewhat. a closer look at some of these indicators however, reveals that some are levelling off only recently. as the indirect effects of past energy price shocks and other pipeline price pressures gradually fade, labour costs – an important component of prices in the services sector – are becoming a dominant driver of inflation. wage pressures are rising and we have factored strong wage growth into our inflation projections. compensation per employee rose by 5. 2 % year on year in the first quarter of 2023 and is expected to continue to grow strongly in the coming months. at the same time, firms in some sectors ( such as trade, transport, accommodation and food ) increased their profits, especially where demand outstripped supply. [ 11 ] looking ahead, this may offer firms room to absorb the impact of wage increases on prices as other input costs moderate. the june 2023 eurosystem staff projections assume a downward trajectory for firms ’ profit margins along these lines. given the crucial role of labour costs in the outlook, we are closely monitoring inflation dynamics in the services sector where these costs play a particularly important role. the ecb ’ s monetary policy response in response to the