- Euro zone inflation soared past the European Central Bank's (ECB) 2% target this month as surging oil and gas costs drove up headline prices, but the jump was smaller than expected, and core inflation declined, muddying the picture for policymakers. Overall inflation in the 21 countries sharing the euro currency jumped to 2.5% in March from 1.9% a month earlier, below expectations for 2.6% in a Reuters poll of economists, as energy costs rose 4.9%.
- Oil prices have nearly doubled as a result of the Iran war and the ECB is now debating whether to raise interest rates to prevent this surge from becoming entrenched in the price of other goods and services.
- A closely watched figure on underlying inflation, which excludes volatile food and energy, meanwhile, fell to 2.3% from 2.4%, data from Eurostat, the EU's statistics agency, showed on Tuesday. "Looking ahead, although this was the biggest monthly increase in headline inflation since late 2022 it tells us little about how far headline inflation will rise or how much it will feed through to core and services inflation," said Andrew Kenningham, chief Europe economist at Capital Economics.
- Basic economic theory argues that central banks should look past one-off price shocks generated by supply disruptions, especially because monetary policy works with long lags. But a quick rise in energy inflation can easily broaden if companies start building this into selling prices and workers begin demanding higher wages for the loss of disposable income. Germany's leading economic institutes cut their growth forecasts for this year and the next, while sharply raising their inflation forecasts in response to the Iran conflict, underscoring the drag the conflict is expected to exert on the economy.
- Financial markets now see three interest-rate hikes from the ECB this year, with the first in either April or June. While some policymakers such as the influential Bundesbank head Joachim Nagel said a rate hike as soon as April was an option, others, including ECB board member Isabel Schnabel, have warned against hasty action. But policymakers agree that the ECB must act if energy starts generating second round price pressures, especially since domestic inflation had been above 2% for years.
(Source: Reuters)