Is high euro area inflation more than an episode?

Next week's March figures on consumer prices in the eurozone will show whether the underlying inflationary pressure has actually risen again recently.

Dr. Ralph Solveen

Commerzbank Economic Research

March 28 2024

Although this would hardly prevent the ECB from cutting interest rates for the first time in June, it would limit the downside potential for key interest rates overall. In the US, employment is likely to have increased significantly in March.

For a long time, it seemed only a matter of time before the inflation rate in the eurozone would return to the ECB's target of 2%. After all, since peaking at over 10% in the fall of 2022, the rate of inflation has fallen as quickly as it had previously risen. Recently, however, this decline has slowed significantly and the underlying inflationary pressure has even increased again. Excluding the often very volatile prices of energy and food, the core index rose by a very strong 0.3% month-on-month in the first two months of the year, whereas in the second half of 2023 it had only risen by around half as much on average.

If this pace continues in the coming months, the core inflation rate would stabilize at around 3% and thus remain well above the ECB's target. And there are certainly arguments for this. After all, the dampening effect of falling energy prices on service prices appears to be easing, meaning that they are once again clearly dominated by the effect of sharply rising wage costs. We therefore assume that the core index rose at a similar monthly rate in March as in the two previous months and that in year-on-year terms, the core inflation rate fell only slightly from 3.1% to 3.0%. As energy prices have probably decreased slightly and are therefore lower than a year ago, the headline inflation rate is likely to fall from 2.6% to 2.4%, but will have bottomed out for the time being.

The national figures from Spain have already been published. Further indications of the eurozone figures due on Wednesday next week will be provided by the national figures from Portugal and France published today and tomorrow (Good Friday), which will be followed by the figures from Germany next Tuesday. The German inflation rate is even likely to fall to 2%. But here too, the underlying momentum is likely to remain as high as in January and February.

Particularly in view of the continuing fall in the headine inflation rate, these figures are unlikely to prevent the ECB from delivering its first interest rate cut in June. The corresponding indications at the last press conference and in many statements by individual ECB Governing Council members were too clear for that. However, if the core inflation rate were to actually stabilize well above 2%, this would noticeably limit the pace and overall extent of interest rate cuts.