Inflation in the euro area weakened more than expected to 2.4 percent in March. In particular, food prices rose much more slowly. Pressure on the ECB to reduce interest rates is increasing.

Inflation in the euro area weakened surprisingly at the end of winter. This means that the first interest rate cut by the European Central Bank (ECB) is increasingly within reach. Consumer prices in the community of 20 countries only increased by 2.4 percent in March compared to the same month last year, the EU statistics office Eurostat announced in an initial estimate on Wednesday. Economists, however, expected an inflation rate of 2.6 percent, similar to that of February. The ECB, which aims for an inflation rate of 2.0 percent as the optimal level for the economy in the monetary zone, is getting closer to its goal with the new data. This is also demonstrated by Germany's inflation data released the day before.

“The inflation countdown is ticking like a clock,” says Alexander Krüger, chief economist at Hauck Aufhäuser Lamp Privatbank. “At the current level, quasi price stability has been achieved and will be maintained for the time being.” From the point of view of chief economist Fritzi Köhler-Geib of the state development bank KfW, reducing inflation remains an arduous task. The pace of wage increases has slowed somewhat. “Only if these positive developments persist and are reflected in prices to a sufficient extent will the ECB consider that the conditions for a first interest rate cut in the summer are met,” he said. According to Bert Colijn, an economist at the ING financial group, the ECB is unlikely to act this month. “We believe the ECB will begin a cautious rate cut in June.”

Core inflation, which excludes volatile energy and food prices, as well as alcohol and tobacco, also continued to decline in March. It fell to 2.9 percent after 3.1 percent in February. Here too, economists expected a smaller drop, up to 3.0 percent. Monetary authorities closely monitor this measure of inflation because it provides them with important information about underlying price trends.

First interest rate cut likely to come in June

Recently, there has been an increase in the number of monetary authorities expecting a first interest rate cut in June. ECB President Christine Lagarde recently said at an event in Frankfurt that the ECB will likely have enough certainty, based on economic data from its June 6 meeting, to decide on an initial interest rate cut. She pointed out that in addition to important data on wage developments, new economic forecasts from ECB economists will then be available. It is not clear how the road should be designed next.

For the next interest rate meeting next week in Frankfurt on April 11, most economists assume that the Euro Central Bank will once again stay put. In view of the fall in inflation, the ECB has maintained since September the deposit rate, which is the reference in the financial market and that financial institutions receive when they deposit their surplus funds in the central bank, at a record level of 4 .00 percent.

Energy prices in the euro area no longer fell as sharply as in previous months: in March they fell by only 1.8 percent compared to the same month last year. In February the drop was 3.7 percent. By contrast, food, alcohol and tobacco prices rose 2.7 percent in March, following a 3.9 percent increase in February. Prices of non-energy industrial goods rose 1.1 percent after 1.6 percent previously.

Services, which are currently a particular focus of the ECB's monetary authorities, increased in price by 4.0 percent in March. It is the fifth consecutive month that the increase in service prices has remained at this level. According to Commerzbank chief economist Jörg Krämer, this is mainly due to collectively negotiated wages, whose increase, according to the ECB, would range between 4.5 and 5 percent over the year. This is not compatible with the inflation target. His conclusion: “In the fight against inflation, the last mile is the most difficult.”

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