Inflation in the euro area slowed to 2.4%

The rate of price growth in the eurozone in March, according to Eurostat, slowed to 2.4% – more than analysts had predicted. The continuation of such dynamics against the backdrop of weak economic growth will allow the European Central Bank (ECB) to begin easing monetary policy before the American regulator. The first rate cut, as expected, could occur in June – at the next meeting in April, the bank will not yet have sufficient data to assess the situation, warned ECB head Christine Lagarde.

Inflation in the euro area countries at the end of March slowed down more than expected, amounting to 2.4% against 2.6% in February and 2.8% in January (analysts expected 2.5%). The monthly figure, however, rose from 0.6% to 0.8%. A sharp decrease in the rate of price growth was noted in Germany – here annual inflation decreased from 3.1% to 2.3%. In France, the figure fell over two months from 3.4% to 2.4%. In Italy, price growth accelerated from 0.9% to 1.3%, but remains below the ECB’s 2% target. At its peak, in the fall of 2022, European inflation was above 10%.

The decrease in the annual figure was primarily due to energy prices (in annual terms – minus 1.8%, in March they decreased by 0.3%). The highest price increase remains in the service sector – 4% (for food – 2.7%, for manufactured goods – 1.1%).

Core inflation (excluding energy and food prices – a more important criterion for the ECB) is also falling. It slowed from 3.3% in January to 2.9% in March, with a monthly increase of 1.1% (0.7% a month earlier). This figure peaked in March 2023.

If inflation continues to fall, the ECB will be forced to start cutting rates. Now market participants expect this to happen no earlier than June. However, even in this case, a change in the monetary policy cycle in the euro area will likely occur earlier than in the United States. The Fed admits that the rate is now at its peak, but avoids signals about its imminent reduction – this is hampered, among other things, by improving economic growth prospects (the regulator’s estimate for US GDP for this year was raised in March from 1.4% to 2.1% , core inflation is still 3.8%).

Let us remind you that the ECB will tighten policy from July 2022. Currently, the base rate on loans is 4.5%, on deposits – 4%, on margin loans – 4.75%. The head of the regulator, Christine Lagarde, ruled out a rate cut in April – the bank would not have enough information for this, while other representatives of the bank’s management spoke in favor of a rate cut in June (and some were in favor of earlier easing).

Indirectly, this position is confirmed by the deterioration of the regulator’s macro forecast: the ECB expects the eurozone economy to grow by 0.6% this year against the previous 0.8% (last year – plus 0.5%). The unemployment rate remains unchanged – in February the figure was 6.5% (forecast for this year – 6.6%). The dynamics of the purchasing managers’ index (PMI) in the euro area industry (according to S&P Global) also indicates low activity – the indicator remains below the level of 50 points. Enterprises are more optimistic about future demand, but prices for finished products continue to decline following costs.

Inflation expectations are also falling: the rate of population-observed inflation in the eurozone fell for the fifth month in a row – it was 5.5% in February versus 6% in January. Expectations for annual inflation dropped from 3.3% to 3.1% – this is the lowest level since the beginning of the military operation in Ukraine. Over the three-year horizon, expected inflation is 2.5%. At the same time, the results of surveys conducted by the ECB indicate higher estimates of nominal income (their growth is expected at 1.4% compared to 1.2% in January), a continued low estimate of economic growth (minus 1.1%) and a higher , as recorded by official statistics, estimates of unemployment – respondents estimate its current value at the level of 10.5%, and in the future – at the level of 10.9%.

Tatiana Edovina