Status: 03/31/2023 12:50 p.m
Thanks to falling energy prices, inflation in the euro zone has eased significantly to 6.9 percent. But that’s not yet a reason for the all-clear. Because the so-called core inflation rises to a record level.
Inflation in the euro zone has weakened significantly thanks to declining energy prices. In March, consumer prices rose by just 6.9 percent year-on-year, according to an initial estimate from the statistics office Eurostat.
Economists had expected a less significant drop in the inflation rate. They forecast a rate of 7.1 percent for March. Inflation has fallen below the seven percent mark for the first time since February 2022. In October it had reached a record value of 10.7 percent.
Inflation is pushed down by energy prices
A so-called base effect is noticeable in the figures. Because after the start of the Russian war of aggression against Ukraine, energy prices shot up sharply. The increased price level now forms the basis for calculating inflation.
The inflation rate is pushed down by energy prices. They even fell by 0.9 percent year-on-year in March. In the previous year there had been a significant increase in energy prices as a result of the Russian war of aggression. In February, energy prices had risen by 13.7 percent. Overall inflation is now being driven by higher prices for food and beverages.
Core inflation continues to rise
Therefore, there can be no question of the all-clear: The core rate, which excludes the volatile energy and food prices as well as alcohol and tobacco, continued to rise in March – to 5.7 percent. This is a record level. In February, core inflation was still 5.6 percent. The increase was expected.
Food, alcohol and tobacco prices rose 15.4 percent after rising 15 percent in February. Non-energy industrial goods rose by 6.6 percent after 6.8 percent previously. Prices for services increased by five percent in March. In February, the increase was 4.8 percent.
In Spain, for example, the headline inflation rate fell from 6 percent to 3.3 percent in March – a remarkable almost three percentage points. If, on the other hand, the volatile energy and food prices are factored out for the Spanish core inflation, inflation fell only minimally from 7.6 percent to 7.5 percent. This shows how strong the mathematical base effects are in the area of energy prices. In Germany, core inflation is 5.9 percent.
Inflation is rampant in the hotel and tourism industry
“As nice as the fall in inflation reads, it has hooks and eyes,” commented Thomas Gitzel, chief economist at VP Bank. In view of the rise in core inflation, there can be no talk of easing inflationary pressure. “The inflation process is increasingly affecting the service sector – including above all the hotel and restaurant sector and the tourism and event industry.”
Dekabank chief economist Ulrich Kater assesses the data more positively: “One should not downplay the fact that energy prices and supply chain problems have calmed down significantly.” This will lead to further relief in inflation in the coming months. “It becomes more difficult with the stubborn price increases, which are further fueled by the strong wage increases, for example.”
ECB still under pressure
The price target of the European Central Bank (ECB) of two percent in the medium term continues to be clearly exceeded. Since July 2022, the central bankers have raised interest rates six times in a row – most recently by 0.50 percentage points in mid-March. In view of the recent turbulence in the banking sector, ECB boss Christine Lagarde had announced that the monetary watchdogs wanted to take a cautious approach for the time being. They did not present a concrete interest rate outlook for the next meetings. However, several currency watchdogs had recently spoken out in favor of further increases in interest rates. A quarter of a percentage point is most likely to be expected at the next two meetings.
“The ECB has repeatedly emphasized that it is currently looking primarily at the core inflation rate,” commented Commerzbank economist Christoph Weil. “In this respect, the central bank is still under pressure to raise interest rates further.”
Where is inflation highest?
The development of inflation in the individual member countries remains very different. The highest rates are in the Baltic States. But in all three Baltic countries, the inflation rate has now fallen below at least the twenty percent mark.
The rate is lowest in Luxembourg (3.0 percent) and Spain (3.1 percent). In Germany, the increase in consumer prices calculated using the European method was 7.8 percent above the level in the euro zone.