Inflation rate sinks below 2.5% in Europe

Analysts expecting an interest cut in June

The inflation that has squeezed European shoppers fell more than expected in March to 2.4 per cent, as cost spikes in the grocery aisle eased and overall price rises headed down in the two biggest economies, Germany and France.

The annual figure for the 20 countries that use the euro currency came in below the 2.5 per cent predicted by financial markets and brings the European Central Bank ever closer to its inflation goal of two per cent.

But analysts say the decline from 2.6 per cent in February, though welcome, would likely not be enough to move up the ECB’s first interest rate cut.

The bank’s rate-setting council meets next week, but the first reduction in borrowing costs is not expected until June despite an economy that’s failing to grow, several analysts said.

Food inflation fell to 2.7 per cent from 3.9 per cent, and energy prices dropped by 1.8 per cent, according to numbers released Wednesday by Eurostat, the European Union’s statistics agency.

Meanwhile, core inflation, which excludes volatile food and energy costs, eased to 2.9 per cent from 3.1 per cent in February.

Annual inflation fell to 2.3 per cent in Germany from 2.7 per cent the month before and to 2.4 per cent in France from 3.2 per cent.

The data from Germany — Europe’s largest economy — “brings some relief for the ECB,” said Carsten Brzeski, global head of macro at ING bank.

But prices for services, which include everything from movie tickets to medical care, are still high, and ECB officials will want to see the latest numbers on wage increases, analysts say.

“We think the ECB will commence with rate cuts in June,” said Rory Fennessy, senior economist at Oxford Economics.

“While core inflation eased, the stubbornness of services inflation and the desire for the ECB for more wage data makes an April rate cut unlikely.”

The U.S. Federal Reserve also is expected to cut rates later this year. Fed officials have pencilled in three rate cuts, even as the decline in inflation there has slowed.

In Europe, inflation spiked to an record high of 10.6 per cent in October 2022 after Russia cut off most of its natural gas to the continent over the war in Ukraine, sending energy prices skyrocketing and driving a cost-of-living crisis.

Along with losing that affordable supply of gas needed to heat homes, generate electricity and power factories, the rebound from the pandemic also strained supply chains, helping push up inflation.

Those price pressures have eased, but now workers are pressing for higher pay to make up for lost purchasing power.

That has slowed the decline in inflation and left the central bank wary of cutting interest rates too soon.