The latest data from both sides of the Atlantic has brought some relief to policymakers as inflation rates show signs of easing. Eurozone inflation slowed sharply in March, with energy prices being a key factor, according to preliminary data from Eurostat. Inflation rates dropped to 6.9% on an annual basis, down from 8.5% in February and a historical high of 10.6% in October 2022.
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Meanwhile, the latest figures from the Bureau of Economic Analysis in the US also show a fall in inflation, with the core PCE (excluding energy and food) falling to 4.6% in February from 4.7% in January. These developments will provide some respite for central banks as they grapple with the challenge of balancing inflationary pressures with interest rate policies that do not harm their banking sectors.
Country-wise inflationary records in Eurozone
According to reports, among Europe’s largest economies, including Germany, France, and Spain, Germany saw a drop in annual price growth from 8.7 percent in the first two months of 2022 to 7.4 percent in March. Similarly, France’s annual inflation rate declined to 5.6 percent in March from 6.3 percent the previous month, while Spain experienced the most significant slowdown with inflation dropping to 3.3 percent compared to 6 percent in February. These trends have raised hopes that the region is moving beyond the worst of the price hikes.
The European Union’s statistics agency, Eurostat, recently released data that revealed Luxembourg had the lowest inflation rate among the 20 eurozone countries in February at 3.0 percent. Moreover, the energy prices declined by 0.9 percent month-on-month, reversing direction after growing to double-digit figures in 2022.
Core inflation still remains high in Eurozone
According to the European Union’s statistics agency, consumer prices in the eurozone rose by 6.9 per cent on an annual basis in March, down from 8.5 percent in February. This is the lowest rate recorded in a year and is lower than expected by analysts. However, the core inflation rate, which excludes volatile food and energy prices, edged up to 5.7 per cent in March from 5.6 per cent a month earlier.
Despite the decrease in headline inflation, ECB President Christine Lagarde noted that core eurozone inflation “is still significantly too high”. Further rate rises are expected to tackle rising prices.
Eurozone analysts predict that the ECB will continue to tighten monetary policy despite the descent in headline inflation, as policymakers are looking for clear signs of core inflation easing. Economist Riccardo Marcelli Fabiani at Oxford Economics commented that “descending headline inflation thanks to cooling energy prices will not be enough for the ECB to stop tightening”. Meanwhile, Colijn from ING noted that 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. ING expects another 25bp hike in May and another in June.
Inflation of US is in downward trend
Data released by the US Commerce Department on Friday showed that the Federal Reserve’s preferred gauge of inflation slowed down in February. The annual personal consumption expenditures price index (PCE) decreased last month significantly with noticeable increases observed in the cost of food, energy, and goods. According to data, the annual personal consumption expenditures price index (PCE), which is the US Federal Reserve’s preferred measure of inflation, slowed to 5% in February compared to 5.3% in the previous month.
Core PCE, which excludes volatile food and energy costs, also eased slightly to record an annual increase of 4.6% in February, down from 4.7% in January.
Challenges for the US economy
In a Friday statement, US President Joe Biden stated that progress is being made in the fight against inflation, which is also proved by recent data.
However, despite these developments, inflation still remains well above the central banks’ 2% targets. Nathan Sheets, Citigroup’s global chief economist, stated that while it is positive news for the Fed, it remains a continuing challenge. The Fed and the ECB have both raised interest rates multiple times to curb high inflation, although recent banking sector turbulence has made it more difficult.
Fall of energy price showing some glimpse of hope
In March, Eurostat reported that energy prices fell by 0.9% after a sharp rise of 13.7% in February. In European trade, the Euro fell against the US dollar for the second consecutive day due to weaker European inflation data, reducing the likelihood of a steep rate hike by the European Central Bank (ECB). Meanwhile, the US dollar extended its gains, with strong forecasts for a 0.25% rate hike by the Federal Reserve in May, which would be the third consecutive hike. The EUR/USD fell 0.5% to 1.0788, after reaching a session high of 1.0844. Recent data showed that consumer prices in the Eurozone rose by 6.9% in March, which was the slowest rate of increase since February 2022, a significant decline from the previous reading of 8.5%, and below estimates of 7.1%.
On the other hand, the dollar index rose 0.45% on Monday against a basket of major rivals. It benefited from the demand for the US dollar as an alternative investment, with investors focusing on the Federal Reserve’s upcoming policy moves to control inflation. However, recent data showed that the US manufacturing sector tumbled to three-year lows in March, which hurt the chances of a Federal Reserve 0.25% rate hike in May, and boosted the chances of a US rate hike later this year. Investors are now waiting for important US labor data, with the JOLTS job openings index expected to show 10.49 million openings in February, down from 10.82 million in January.
What will be the next moves of central banks of these countries?
With this trend of downfall, investors are keeping a close watch on inflation figures to assess the central banks’ next moves, with concerns that rising interest rates could adversely affect the banking sector. Bloomberg and financial firm FactSet had previously projected that the Eurozone’s inflation rate would climb to 7.1 percent in March. The European Central Bank (ECB) has repeatedly raised interest rates to combat inflation, but the next steps remain uncertain in light of the recent upheaval in the banking sector.
According to Burt Colein, a Senior Eurozone Economist at financial group ING, the ECB is likely to raise interest rates in the near future due to the potential for core inflation to remain more resilient than anticipated. The rate hike is anticipated to occur in May or June 2023. As previously reported, the Eurozone’s inflation rate in February 2023 stood at 8.5 percent annually, with energy price growth in the Eurozone dropping to 13.7 percent in February from 18.9 percent in January. The mild winter on the continent has alleviated the effects of the Russian invasion of Ukraine, which is expected to become more evident in March 2023.