Eurozone inflation appears to be lower than expected

Lower than expected inflation figures in Germany, France, Italy and Spain increase the chance that currency depreciation in the euro zone will also be less high than expected on Wednesday.

Last week it was already seen that the French, Spanish and Italian inflation figures for March were lower than expected. On Tuesday, inflation in Germany also appeared to drop significantly. That is good news for investors hoping for an interest rate cut from the European Central Bank (ECB).

In line with expectations, German monetary depreciation decreased from 2.5 to 2.2 percent, while the European benchmark for German inflation fell from 2.7 to 2.3 percent. The latter figure was lower than the consensus 2.4 percent. Earlier in the day, the inflation figures of the German states were also good.

“Inflation was lower than expected in the four largest euro countries,” says ECB watcher Frederik Ducrozet. ‘That is why the flash estimate of inflation in the currency union should also be lower than expected on Wednesday.’ The consensus thinks inflation has fallen from 2.6 to 2.5 percent, while the core component may have fallen from 3.1 to 3 percent.

‘The core inflation (inflation without volatile energy and food prices, ed.) could have fallen below 3 percent,” says Ducrozet. “That would be in line with the Monetary Authority’s estimates for the first quarter. The ECB appears to be keeping interest rates stable in April, followed by a first cut in June.’

Despite the better-than-expected German inflation rate, the German ten-year interest rate rose by 10 basis points to 2.4 percent on Tuesday. Interest rates are also rising elsewhere in Europe. The Belgian ten-year interest rate rises by 11 basis points to 2.99 percent. This appears to be mainly due to US interest rates, which rebounded due to better-than-expected data on US industry on Monday. According to traders, this reduces the chance of significant interest rate cuts from the US central bank (Fed) later this year. This has an impact on the European bond markets.

ING analyst Charlotte de Montpellier delved under the hood of French inflation. French monetary depreciation decreased from 3 to 2.3 percent in March, while the statistics agency INSEE previously expected 2.4 percent. “The figures are very good news and indicate that inflation will return to 2 percent in 2024.”

“All major components of the French inflation rate recorded a decline in price growth,” De Montpellier continues. ‘The sharpest slowdowns occurred in food, energy and tobacco. In addition, goods inflation was almost zero, while services inflation fell from 3.2 to 3 percent.’

Although the economist expects French inflation to fall below 2 percent in the course of 2024, she expects price increases to accelerate in the second quarter. ‘Due to rising oil prices, the energy component will rebound sharply in the coming months. The basis for comparison will be more difficult because oil prices are now higher than a year ago. Inflation may temporarily rise above 2.5 percent.’

At the same time, she says, services inflation will remain close to 3 percent in the coming months. “According to the French central bank, employee wages will increase by an average of 3.4 percent in 2024. That is less than the 4 percent we saw at the start of 2023.” She emphasizes that wage developments are important for services inflation, because wage costs make up a large part of costs.