Eurozone inflation drops more than expected in March

With core inflation, which excludes food and energy costs, at 5.7%, further interest rate rises could be on the way

While headline inflation is expected to drop, food inflation and core inflation remains high. 

Eurozone inflation is estimated to have dropped moderately down to 6.9% during the month of March, new flash estimates suggest.

In February, eurozone inflation was running at an annual rate of 8.5%. The slowdown was driven by a steep retreat in energy costs from the eye-watering levels they reached after Russia attacked Ukraine last year.

However, core inflation, which excludes food and energy costs, quickened to 5.7%, showing the currency bloc’s worst-ever price spike is far from over. Food inflation alone stood at 15.4% in annual terms. 

The contrast between dropping overall inflation but growing core inflation is being seen in some of the eurozone’s biggest economies, with underlying price growth barely budging in Spain even as the headline measure almost halved to just 3.1%.

ECB officials are increasingly focused on the former, reflecting concern the shock from soaring power and heating costs has brought about a phase of domestically driven inflation as firms hike prices and workers demand higher salaries to make up for lost purchasing power.

After 350 basis points of rate increase since last July, ECB president Christine Lagarde said this month that officials “will be looking to see a sustained downward turn in underlying inflation measures to be confident that the inflation path will converge to our target in the medium term”. 

Returning to that 2% goal has become more complicated in recent weeks due to turmoil in the financial sector that culminated in UBS’s takeover of Credit Suisse.

While the upheaval may lead to more restrictive lending — a disinflationary force — “it’s completely open for now how big that effect” will be, ECB executive board member Isabel Schnabel said this week.

For now, the banking stress is easing — prompting more hawkish ECB policymakers to urge further rises in borrowing costs.

• Bloomberg