Inflation in the euro zone fell more than expected in March, as soaring prices in the grocery aisle eased and overall price increases were contained in Germany and France, the two largest economies. The basis for the European Central Bank (ECB) to start reducing borrowings has been solidified. Costs are at an all-time high.
The annual rate for the 20 countries using the euro currency was 2.4%, lower than the 2.5% expected by financial markets and moving the ECB closer to its 2% inflation target.
But analysts expect the drop from February's 2.6%, while welcome, will not be enough to trigger the ECB's first rate cut.
The central bank will hold a rate-setting council next week, but analysts said the first reduction in borrowing costs is not expected until June, despite slowing economic growth.
According to the European Union's statistics agency Eurostat, food inflation fell from 3.9% to 2.7% and energy prices fell by 1.8%. Meanwhile, core inflation, which excludes volatile food and energy costs, fell to 2.9% from 3.1% in February.
Annual inflation fell to 2.3% in Germany from 2.7% last month, and to 2.4% in France from 3.2%. Carsten Brzeski, global head of macro at ING, said the data from Germany, the eurozone's largest economy, “brings some relief to the ECB.”
But prices for services, which include everything from movie tickets to healthcare, remain high and ECB officials will want to see the latest figures on wage increases, analysts say.
“We think the ECB will start cutting rates in June,” said Rory Fennessy, senior economist at Oxford Economics. “Although core inflation has eased, the persistence of services inflation and the ECB's call for further wage data make an April rate cut unlikely,” he said.
The US Federal Reserve (Fed) is also expected to cut interest rates by the end of the year. Fed officials decided to cut interest rates three times even though the decline in inflation has slowed.
In Europe, inflation soared to a record high of 10.6% in October 2022 after Russia cut off most natural gas to the continent due to the war in Ukraine. This caused energy prices to soar and a cost-of-living crisis.
In addition to eliminating affordable gas supplies needed to heat homes, generate electricity and power factories, the fallout from the pandemic has also strained supply chains and pushed up inflation.
While these price pressures have eased, workers are now demanding higher wages to make up for lost purchasing power. This slowed the decline in inflation and made the ECB wary of cutting interest rates too soon.
The ECB rapidly raised its main policy interest rate from -0.5% to a record high of 4% from July 2022 to September 2023. Raising interest rates fights inflation by increasing credit, encouraging people to buy, curbing spending, and easing upward pressure on prices.
But rate hikes could also hurt economic growth, and the focus is on when the ECB declares victory over inflation and begins cutting rates to support the stalled economy. The economic slowdown came as inflation drained purchasing power from consumers' pockets and interest rates began to rise.
The eurozone economy will not grow in the last three months of 2023, with statistics for the first three months of this year due to be released on April 30th.
