Inflation is down in the Eurozone, but not the core component

Eurozone inflation slows sharply year-on-year: from plus 8.5 percent in February to plus 6.9 percent in March. This is the largest deceleration recorded to date by Eurostat and is higher than the consensus of economists (plus 7.3 per cent). The cause is due to the collapse in the prices of energy goods, proving right those who have always maintained that the surge in inflation was due to a supply shock. However, the underlying component still remains high. Indeed it continues to increase, albeit slightly, as shown by the trend of the core index (which excludes energy and food) in the last six months: in November 2022 it showed an increase of 5 per cent, in December of 5.2 per cent percent, 5.3 percent in January, 5.6 percent in February, 5.7 percent in March (in Italy, core inflation is even higher: from more than 6.3 percent to February went up 6.4 percent from March).

This means that compared to the initial supply shock, there is now a demand component which pushes prices up. According to some analysts, steadily rising core inflation is keeping central bankers on alert about the next monetary policy measures. “We remind you that the latest estimates by ECB experts forecast core inflation at 4.6 percent in 2023 and we are well above the target – observes Ig Italia in a research -. At the moment we believe it is difficult to speculate that the European Central Bank will take a break from fighting inflationary pressures. We expect it to raise the cost of money again at the May meeting. The next macro data published in the Eurozone will tell us whether the increase will be 25 or 50 basis points”. But there are also those who believe that the turbulence of recent weeks has been a clear warning to Frankfurt that too abrupt a monetary tightening can put pressure on banking and financial activities, which is why more cautious hikes are to be expected from now on. In both cases, the peak in rates was not reached in the Eurozone as some perhaps too optimistic assumed. “Core inflation is still too high,” said Christine Lagarde yesterday, underlining that “there is a lot of uncertainty” and therefore the ECB will evaluate the data at each meeting.