Eurozone March inflation drops to 2.4%

Eurozone inflation declined to 2.4% in March, falling below expectations. This development has strengthened expectations that the European Central Bank will implement interest rate cuts by the summer.

The deceleration in annual consumer price growth from 2.6% in the previous month was attributed to smaller increases in food and goods prices, which offset steady services prices. This information was released by the EU statistics office Eurostat on Wednesday.

The alleviation of the region's most severe cost-of-living crisis in a generation will be a relief for the ECB, which convenes next week to deliberate on the timing of monetary policy loosening. While most analysts anticipate policymakers to hold off until June to initiate rate cuts.

Many rate setters are concerned that rapid wage growth continues to drive up costs in the labor-intensive services sector. Prices in this sector have been rising steadily at an annual pace of 4% for the fifth consecutive month.

Some economists had anticipated that eurozone services inflation would increase in March due to the earlier timing of Easter. This was expected to elevate prices for package holidays and flights.

Core inflation, which excludes energy and food prices to provide a clearer view of underlying price pressures, declined slightly more than economists anticipated to 2.9% in March, down from 3.1% in February.

Eurozone inflation has significantly decreased from its peak of 10.6% in October 2022, following the disruption caused by the coronavirus pandemic and Russia's invasion of Ukraine, which resulted in the largest price surge in decades. This decline has brought it tantalizingly close to the ECB's 2% target.

Senior ECB policymakers, however, have indicated that they are inclined to wait until June before deciding on potential rate cuts. This delay would allow them more time to assess whether wage pressures are moderating sufficiently to steer inflation towards their target.

Separate data released by Eurostat on Wednesday revealed that the eurozone labor market continued to display resilience. The unemployment rate remained steady at 6.5% in February, unchanged from a slightly upwardly revised figure in January.

One concerning indicator for rate setters was the month-on-month increase in consumer prices in the single currency bloc, which rose by 0.8% in March, accelerating from 0.6% the previous month. Additionally, the month-on-month core inflation rate increased to 1.1%.

On an annual basis, fresh food prices in the eurozone experienced their first decline in nearly three years, dropping by 0.4% in March. Energy prices also fell, but at a slower rate compared to February, with a decline of 1.8%. Meanwhile, goods prices rose by 1.1%, marking the slowest pace of increase since 2021.

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