Global Daily – The eurozone inflation jump…how far and how long?

by: Aline Schuiling , Nick Kounis

Euro Macro: Eurozone inflation jumps higher on energy prices, but core subdued – A number of eurozone countries published inflation data for March today. The preliminary estimate for the eurozone aggregate will be published tomorrow. Inflation jumped higher in March in all countries, ending up largely in line with the expectations. The rise in inflation was mainly driven by base effects in energy price inflation, which jumped higher as a result of oil prices collapsing during the first wave of the pandemic a year ago.

First, Spain reported a jump in HICP inflation to 1.2% in March up from -0.3% in February. In a written statement Spain’s statistics bureau INE mentions that inflation excluding food and energy stabilised at the very low rate of 0.3% in March. Meanwhile, Belgium’s statistics bureau published a rise in the CPI inflation rate (harmonised rate has not yet been published) to 0.9% in March, up from 0.5% in February. According to Statbel inflation without energy declined to 0.76 % in March, compared to 0.87 % in February. Core inflation, which excludes energy products and unprocessed food, stood at 0.96 % in March, compared to 1.01 % in February.

Eurozone inflation temporarily lifted by energy prices, % yoy

Source: Thomson Reuters Datastream, ABN AMRO Group Economics

Finally, Germany’s Statistisches Bundesambt reported that the harmonised inflation rate increased to 2.0%, up from 1.6% in February. Not all details for German inflation have been published, but the statistics bureau mentioned that energy prices inflation jumped to 4.8%, up from 0.3% in February. Moreover, Germany’s detailed regional inflation reports suggest that core inflation was roughly unchanged in March, with the inflation rate of clothing and shoes and hotels and restaurants falling and that of package holidays rising. Having said that, the numbers again were distorted (most likely upwards) by the corona crisis, which continued to cause price collection problems as some products were not available in the market.

Outlook for eurozone inflation, % yoy

Source: Thomson Reuters Datastream, ABN AMRO Group Economics

Inflation will accelerate further this year, but set to be weak in the medium term – We are roughly only half the way up in terms of the eventual rise in headline inflation (relatively to the February outcome), with the peak likely to be around 2%. However, the factors driving the move – food, energy prices, statistical effects from tax hikes and some service sector price rises once lockdowns end – are transitory in nature and inflation will fall sharply from the start of next year onwards. Inflation over the 2-3 year horizon will depend on the amount of spare capacity in the economy and a large output gap will remain in the eurozone despite strong economic growth in the second half of the year and next year. (Aline Schuiling & Nick Kounis)