Activity in Europe’s services sector is picking up rapidly. Whether that’s a good thing depends on the read-through for inflation.

The flash read on S&P Global’s services sector PMI for the European economy in April was 56.6, data released on Friday in conjunction with Hamburg Commercial Bank, showed. That was a 12-month high.

The composite gauge was likewise buoyant, at 54.4. There’s now a very wide disparity between the fortunes of services businesses and factories.

The manufacturing print was 45.5, indicative of contraction and a 35-month low. So, growth is driven entirely by services.

Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, described the services sector as “partly booming.” I’m not sure that works. “Partly booming” is like “halfway screaming” — it gets the point across, but it’s not clear why you wouldn’t choose a less aggressive verb instead of tempering one that doesn’t really apply.

Anyway, Europe’s reversal of fortune is still a remarkable story. It wasn’t so long ago when dire predictions about existential energy crises were pervasive. Now here we are looking at a services-driven expansion that’s gathering steam.

The lackluster read on manufacturing activity was exacerbated by poor readings on French factory output, attributable in part to ongoing social unrest tied to Emmanuel Macron’s pension problem. “The current widespread protest activity… is leaving a visible mark on the manufacturing survey results,” Norman Liebke, a Hamburg Commercial Bank economist, remarked, adding that there were “surprisingly no traces of the protests in the services sector.”

In Germany, the manufacturing PMI remained squarely in contraction territory, but the output index remained above the 50 demarcation line. Factories worked through backlogs with the help of another record improvement in delivery times, but new orders fell. Activity in Germany’s services sector accelerated at the briskest pace in a year.

The “problem” with the robust services activity across the region is that services is where the sticky inflation lives. It’s no coincidence that services inflation is percolating alongside activity.

For much of 2022, it was possible to argue that European inflation was a function of war dynamics and that as such, it was beyond the ECB’s control and would probably moderate on its own given that existential energy crunches aren’t generally conducive to happy consumers spending freely on discretionary services. That argument became untenable when the war premium came out of gas prices, the economy dodged a winter recession and the inflationary impulse found its way into wage-setting.

The good news is that the bloc not only averted a worst-case economic outcome tied to the war, but in fact came out closer to a best-case outcome, if you don’t mind the manufacturing malaise. The bad news for the ECB is, that’s inflationary on the services side, and services inflation is very difficult to dislodge.

You’re reminded that although headline inflation fell by the most ever in March (as the war comps begin to drop from the lookback), core inflation hit yet another new record in Europe.

Although input costs and selling prices moderated further in early April, the flash PMIs released Friday suggested they’re still very elevated historically, particularly on the services side. “Price developments in the services sector are likely to continue to worry the ECB,” de la Rubia went on, in the color accompanying the bloc-wide release. “Neither input prices nor sales prices are showing any significant slowdown.”

Luis de Guindos, speaking at an event in Madrid, lamented that, “Core inflation remains very sticky.”