The Harmonised Index of Consumer Prices (HICP) for the eurozone hit a year-on-year growth of 2.4% for March, coming in below the 2.6% expectations for the month.
The year growth is a drop from February’s 2.6%, but the European Central Bank retains an inflation target of 2%. The core HICP, which excludes energy, food, alcohol, and tobacco, sits at 2.9% year-on-year for March, under February’s 3.1%.
As inflation numbers come in below expected levels after proving sticky, Morningstar’s European field strategist Michael Field said the numbers come as a “positive surprise” and will excite investors for rate cuts.
“The ECB is expecting inflation to fall to 2.3% by year end, reaching its 2% target sometime in 2025. So, a 2.4% reading for March would suggest that we are in fact running ahead of target,” Field said.
“The closer this number gets to the hallowed 2% level, the more assurance the central bank will have that inflation is well and truly under control.”
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Field added: “While a positive move, today’s figure is not likely to materially influence any rate cutting decisions, with a recent Reuters poll showing that 90% of economists surveyed expect the first interest rate cut in June. Only a large shift in economic data between now and then is likely to alter this likelihood.”
Natasha May, global market analyst at JP Morgan Asset Management, also cautioned against too much excitement based on the March levels, noting that a cooling in wage growth, leading to services inflation levels, will be necessary for cuts.
“Today’s eurozone inflation release will elicit sighs of relief in the ECB, with headline and core inflation both once again moving lower. But looking under the surface of March’s inflation numbers suggests the central bank’s Governing Council shouldn’t be popping the champagne corks just yet ,” May said.
“Services inflation – the biggest component in the eurozone inflation basket – appears stuck at 4% year-on-year, well above the ECB’s 2% target. These prices are mainly driven by domestic labour costs, which remain high thanks to strong wage growth and weak labour productivity.
“Of course, there was some good news in today’s print: past commodity price declines and smoother supply chains mean core goods inflation continues to slow, and food prices are still decelerating. But relying on volatile commodity prices for sustainable disinflation is a risky business – it’s the labour market that’s driving underlying price pressures.”
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While services have not yet loosened, chief investment officer at Quintet Private Bank Daniele Antonucci believes the slowing of non-industrial goods and food creates space for a cut.
“Alongside this, even though the labour market remains resilient and there are tentative signs that the economy might be bottoming out, the pace of economic growth is likely to stay weak in the near term,” Antonucci said.
“This is why we think the central bank has room to cut. Inflation is slowing, maybe unevenly – but it is, and growth is weak, perhaps holding up relative to previous recession expectations, but remaining sluggish nonetheless.”
