Consumer goods in 2023

Euro zone inflation eases in March

What’s happened?

Consumer price inflation in the euro zone slowed to 2.4% year on year in March—below market expectations of 2.6% and down from 2.6% in February—according to a flash estimate released by Eurostat.

Why does it matter?

Inflation in the euro zone is gradually converging towards the 2% target of the European Central Bank (ECB) on the back of declining energy prices and slowing food price growth. This is positive news for the ECB, as it will help to pave the way for expected policy rate cuts in June. Inflation shows modest variation across euro zone economies, ranging from 0.3% in Lithuania to 4.9% in Croatia. In March inflation in Germany (2.3%) and France (2.4%) both slowed for a third month, while Italy (1.3%) and Spain (3.2%) both saw an uptick.

Demand-driven price pressures tied to still-tight labour markets—with unemployment in the euro zone remaining stable at a record low of 6.5% in February—will cause some stickiness in inflation. Core inflation (excluding energy and food prices), at 2.9% in March, remained above headline inflation and well above the ECB’s target, driven by still-strong services price inflation. Services prices are being pushed up by nominal wage growth, which began to cool in the fourth quarter of 2023 but remained elevated by historical comparison, at more than 4%.

Christine Lagarde, the ECB president, has said several times that monetary policy easing will start only when there is more convincing data showing that wage growth is easing. There are signs that demand for labour is slowing, with a slight reduction in the number of vacancies advertised in 2024. Wage dynamics—in particular the first-quarter data on negotiated wages that will be released in May—are thus the key indicator that the ECB will be monitoring ahead of its decision to lower interest rates.

What next?

We expect a continued gradual slowdown in euro zone inflation in the second quarter of 2024. With the labour market beginning to cool, we expect services price inflation to begin to ease after remaining elevated at 4% since November 2023. Disruption to shipping in the Red Sea and geopolitical risks in the Middle East remain an upside inflationary risk, but the impact of higher shipping costs on inflation has so far been limited. We continue to expect that the ECB will keep policy rates on hold at its next meeting on April 11th, before lowering rates in June.

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