Eurozone inflation plummets below target in March

LONDON Inflation across the 19-country eurozone fell sharply in March, official figures showed Friday, due to softer underlying price increases and as some of last year’s sharp rise in oil prices dropped out of the annual comparison.

The European Union’s statistics agency Eurostat said the annual consumer price inflation rate was 1.5 per cent, down from two per cent in February. That puts inflation back below the European Central Bank’s target of just under two per cent and may ease the pressure on policy-makers to bring an imminent end to their stimulus efforts.

Expectations for a sizable decline in inflation had been anticipated after lower than anticipated German figures for March. But the scale of the fall has prompted some in the markets to suggest that inflation in the eurozone may have peaked for now. “March’s sharp slowdown in eurozone inflation was partly driven by temporary factors that will reverse in April, but the big picture is that inflation is now on a downward trend,” said Jack Allen, European economist at Capital Economics. “The ECB is likely to maintain its view that the economic recovery has not put inflation on course to meet its medium-term goal.”

The ECB has enacted a broad package of measures over recent years to get eurozone inflation up toward its target and shore up the economic recovery, including cutting its main interest rate to zero and buying government bonds from financial institutions to keep a lid on market interest rates. Ratesetters have seen growing pressure to reverse course as inflation went above target — albeit for one month — and growth has shown signs of building momentum.

The likely concern for ECB policy-makers is the fact that underlying price increases remain weak and, according to Friday’s figures, are getting weaker.

The annual core rate, which strips out the volatile items of food, energy, tobacco and alcohol, fell to 0.7 per cent from 0.9 per cent. That points to weak wage growth in the eurozone even at a time when unemployment has been falling.

The spike in inflation in recent months has been largely due to the sharp rise in oil prices over the past year. In March, they were up by 7.3 per cent compared with the same period last year. While a lot, that’s still two percentage points less than the annual rise registered in February.