Inflation in the 20 countries that use the euro currency slowed to the lowest level in a year as energy prices dropped, but food costs were still on the rise, keeping pressure on the European Central Bank to hike interest rates further.
Consumer prices in the euro zone jumped 6.9 per cent in March from a year earlier, down from 8.5 per cent in February, according to data released Friday by the European Union’s statistics agency, Eurostat.
Euro zone inflation has been easing since peaking at 10.6 per cent in October, and the latest figure is slightly below what most economists had expected. It reflects significant drops in some of the continent’s bigger economies like Spain and the Netherlands, where inflation halved in March.
Economists looked beyond the headline number to focus on so-called core inflation, which increased to a record 5.7 per cent from 5.6 per cent the previous month. Core inflation, which excludes volatile food and energy prices, can give a better sense of whether inflation is becoming entrenched in the economy over the longer term.
“The potential for core inflation to remain stickier than hoped will be the main reason for the ECB to continue to hike in the near term,” said ING Bank’s senior euro zone economist Bert Colijn.
The European Central Bank, which is trying to get inflation back down to its 2 per cent goal, will rely on incoming data to make its future decisions and is “neither committed to raise further nor are we finished with hiking rates,” bank President Christine Lagarde said last week.
Central bankers’ jobs have become more complex after the collapse of two U.S. banks, including Silicon Valley Bank, were sparked in part by rapid interest rate rises aimed at taming inflation. The ensuing global financial turmoil forced the takeover of troubled Swiss lender Credit Suisse by rival UBS and raised concerns about the fallout in already-weak major economies.
Despite that, the ECB, U.S. Federal Reserve and Bank of England all raised interest rates this month as they focus on combatting price spikes. Inflation stood at 6 per cent in the U.S. and 10.4 per cent in the United Kingdom in February.
In the euro zone, prices for food, alcohol and tobacco rose by a painful 15.4 per cent, faster than the previous month’s 15 per cent, in a sign that European consumers are still getting squeezed.
Energy prices, however, fell 0.9 per cent – an abrupt change of direction after rising at double-digit rates over the past year. The plunge was expected after the costs of oil and natural gas surged in March 2022, when Russia invaded Ukraine.
The war notably pushed up prices for natural gas used to heat homes and generate electricity last year as Russia largely cut off supplies to Europe, fuelling overall inflation. The latest reading indicates that a mild winter and efforts to store and source gas from non-Russian sources have paid off.
Prices for goods dipped to 6.6 per cent from 6.8 per cent the previous month, while services climbed 5 per cent, up from 4.8 per cent.