Eurozone inflation keeps falling, despite earlier Easter

On the ECB’s seasonally-adjusted measure, the HICP (both headline and core) rose just 0.2% m/m – a relatively benign rate of price growth. Undershoots in French and German inflation data over the past few days had already pointed to a lower reading than our initial forecast for March, which was for inflation to stabilise at 2.6%, but the drop was even bigger than our updated expectation of a fall to 2.5%.

The full details are not yet available, but the bulk of the downside surprise came from energy (which remained more of a drag than expected, at -1.8% y/y), as well as goods (which fell to 1.1% y/y from 1.6% in February). Food inflation also continued to decline, despite the earlier timing of Easter this year, which typically puts upward pressure on food inflation. Indeed, though services inflation remained elevated at 4.0% y/y, the earlier Easter timing also likely put upward pressure on this category, with an upward distortion probably coming from package holidays (as we typically see in Easter). With this upward distortion expected to go into reverse in April, renewed declines in services are likely on the cards. This should also result in a further decline in core inflation in the coming months.

Overall, disinflation in the eurozone remains very much on track, and we continue to expect inflation to be broadly back at 2% by the middle of the year. Combined with a further expected fall in wage growth (see here), this will pave the way for the ECB to start lowering rates from June. For more, see also our eurozone monthly update here.