Inflation in the eurozone fell to 2.4% year on year in March, down from 2.6% in February, according Eurostat's flash estimate, more than economists' expectations.
“March’s flash reading of inflation showed a 2.4% rise year on year, a 0.2% fall from last month’s reading. Economists had been expecting a flat reading month over month, so today’s number comes as a positive surprise. With inflation now within spitting distance of the ECB’s 2% targeted level, investors will be even more convinced that interest rate cuts are on the near-term horizon,” said Michael Field, European market strategist at Morningstar.
Core inflation, which shows prices without energy and food costs, also fell to 2.9% year on year. It was at 3.1% in February.
In March, the greatest contributors to eurozone inflation were services (+4%, stable compared to February), followed by food, alcohol and tobacco (+2.7% year on year, down from previous month), non-energy industrial goods (+1.1%) and energy (-1.8%), according to Eurostat estimates.
“Services inflation – the biggest component in the eurozone inflation basket – appears stuck at 4% year-on-year, well above the ECB’s 2% target,” said Natasha May, global market analyst at J.P. Morgan Asset Management.
“These prices are mainly driven by domestic labour costs, which remain high thanks to strong wage growth and weak labour productivity. Of course, there was some good news in today’s print: past commodity price declines and smoother supply chains mean core goods inflation continues to slow, and food prices are still decelerating. But relying on volatile commodity prices for sustainable disinflation is a risky business – it’s the labour market that’s driving underlying price pressures.”
Will the ECB Cut Rates on April 11?
The European Central Bank will meet on April 11, but it is not expected to change monetary policy.
“While a positive move, today’s figure is not likely to materially influence any rate cutting decisions, with a recent Reuters poll showing that 90% of economists surveyed expect the first interest rate cut in June. Only a large shift in economic data between now and then is likely to alter this likelihood,” said Field.
“The ECB is expecting inflation to fall to 2.3% by year end, reaching its 2% target sometime in 2025. So, a 2.4% reading for March would suggest that we are in fact running ahead of target,” he added.
“Additionally, core inflation, which strips out volatile components such as food and fuel, also showed a 0.2% decrease to 2.9% over the period. Although this was slightly worse than expectations, it is at least still moving in the right direction. The closer this number gets to the hallowed 2% level, the more assurance the central bank will have that inflation is well and truly under control.”
J.P. AM's May stressed the importance of wage data. “The ECB has given a strong signal that June will see the first rate cut. To fulfil this guidance, then, more evidence of cooling wage growth – and therefore services inflation – will be needed. If not, markets may end up disappointed,” she ended.
