Inflation in the Eurozone remains steady

The European Statistical Office (Eurostat) has released preliminary inflation data for the Eurozone for March. According to the data, annual inflation in the Eurozone, which was 2.6 percent in February, was recorded at 2.4 percent in March. The CPI showed a monthly increase of 0.8 percent in March.

Market expectations were for annual inflation in the Eurozone to be 2.5 percent in March. Core inflation in the Eurozone was measured at 2.9 percent annually and 0.9 percent monthly in March.

According to EU-harmonized data, inflation in March was determined to be 2.3 percent in Germany, 2.4 percent in France, 1.3 percent in Italy, and 3.2 percent in Spain.

HIGH PROBABILITY OF INTEREST RATE CUTS

Eurozone inflation slowed more than expected, strengthening the possibility of the European Central Bank cutting interest rates in June.

Consumer inflation slowed to 2.4 percent annually last month from 2.6 percent in February, in line with the Bloomberg Economics Nowcast model. The median expectation of analysts participating in the Bloomberg survey was for a 2.5 percent increase.

The core indicator, which excludes volatile items such as food and energy, also slowed more than expected, falling to 2.9 percent.

The data strengthens the evidence that European Central Bank (ECB) members are on track to return inflation to their 2 percent target, while also allowing them to ease their restrictive stance slightly in the near future. European Central Bank President Christine Lagarde had signaled the first interest rate cut in June, in light of new forecasts and updates on wage growth in the first months of the year.

The central bank governors of Germany, France, and Spain also supported this guidance, while very few ECB members suggested the need for an earlier interest rate cut. Economists and market pricing have also pointed out that a significant shock would need to occur for this timeline to change.

While logistical problems in the Middle East and the collapse of the bridge in Baltimore, USA, do not appear to be affecting prices, rising wages in the 20-country Eurozone remain on the radar of economists.

ECB Chief Economist Philip Lane had stated that wage growth must continue to decline for interest rate cuts. Although a critical wage indicator in the Eurozone showed some moderation at the end of 2023, salaries continue to rise by over 4 percent. This situation maintains price pressures in the service sector, where labor has a major impact on final costs.

ACTION MAY BE TAKEN

While inflation in this sector remained at 4 percent in March, inflation for non-energy industrial goods fell to 1.1 percent. Trends also vary across the region. Inflation in Spain accelerated after the government removed some of the support implemented to keep energy costs under control, while an increase was also observed in Italy.

Data from Germany and France showed that inflation declined for the third consecutive month. These trends make it difficult for the ECB to determine the optimal path after the first interest rate cut. ECB members have already turned their attention to the pace of subsequent steps.

However, members ultimately agree that economic data will be the deciding factor. Lagarde had also stated that the ECB would take action as new data becomes available. In a statement last month, Lagarde said they could not pre-commit to a specific interest rate path after the first rate cut.