Eurozone underlying inflation rises further in March, adds pressure on ECB

Annualized inflation in the Eurozone eased to 6.9% in March from 8.5% in February, in line with expectations and mainly driven by strong fall in energy costs, but so called core inflation, excluding the most volatile components, rose to 5.7% in March from 5.6% previous month.

Further rise in underlying inflation signals that fighting persisting price pressures will be much more difficult, as sharp rise in energy prices during 2022 have caused a domino effect, spreading inflation into all sectors of the economy.

The latest inflation report put the European Central Bank under fresh pressure, as fight with entrenched inflation will continue, despite the fact that the central bank has already raised its interest rates by impressive 350 basis points in less than one year.

The ECB policymakers need to decide the size of the rate hike on May 4 policy meeting, with currently prevailing expectations for 25 basis points, but release of April inflation report, just days ahead of the central bank’s meeting, expected to provide more evidence and help the ECB to decide whether to deliver 25 or 50 basis points hike.

The central bank faces big problems from exceptionally tight labor market and expected rise of wages by 5%-6% this year, as well as sharp increase of food prices, which fuel inflation and make more difficult ECB’s efforts to shore up inflation and push it towards 2% target.

According to March inflation numbers, ECB’s rate hike in May is unlikely to be the last, as markets see more room for increasing borrowing cost towards the terminal rate, with acceleration in underlying inflation expected to persist in coming months, before the price pressures start easing sometime in the third quarter of 2023.