Eurozone inflation falls back unexpectedly

Eurozone inflation in March retreated more than expected, according to data published on Friday, after a prolonged period of rising prices.

A preliminary reading of the consumer price index showed a 1.5% rise in March compared to the same month last year, down from the 2.0% rise in February and shy of the 1.8% the market was expecting.

Core CPI, which excludes the more volatile elements of the CPI inflation measures such as energy and food prices, rose only 0.7%, its lowest reading since April 2015, when it had been forecast to stay around at around 0.9%.

With Easter arriving 20 days later than in 2016, economists said the usual surge in holiday prices is likely occur in April instead, and was likely the source of some of the decline.

The slowdown in Eurozone price growth followed Thursday's preliminary harmonised index of consumer prices from Germany that showed annual inflation falling to 1.5% in March, below consensus expectations of 1.8% and a sharp deceleration from the 2.2% recorded in February.

In Italy, annual CPI inflation slowed to 1.4% in March down from 1.6% in February, while price growth fell even more sharply in Spain to 2.1% down from 3.0% in March and French consumer price growth remained unchanged at 1.4%.

Part of this slowdown in inflation can be explained by the sharp drop in the oil price seen in March, said economists at Centre for Economics and Business Research in London, though Brent crude has recovered partly this week.

They added: "Fluctuations in the oil price have led to heightened volatility in the headline inflation index in recent years, which is why the European Central Bank stressed at its latest policy meeting that any decision to change monetary policy would need to be based in a sustained change in core inflation."

Economist Florian Hense at Berenberg said the market’s recent excitement about inflation risks in the Eurozone "were premature".

"Underlying forces of demand and supply are not yet in place to sustain a rise in inflation to the ECB’s target of 'below, but close to 2%' until summer 2018 at the earliest," he said.

"This is broadly in line with the expected duration of the ECB’s QE programme, with monthly asset purchases of €60bn until December this year, tapering starting from January 2018 and a first rate hike in September 2019."

He added that with the recovery in the Eurozone some two years behind the US and UK, with unemployment rate remaining high at 9.6% and wage growth subdued, many households and businesses still need to further repair their balance sheets after the Lehman and euro crises.

"Low borrowing costs can help to speed up the adjustment. At least part of the Eurozone’s current improving growth is due to the ECB’s accommodative monetary stance. As long as underlying inflationary pressure remains low, the ECB can keep its monetary policy accommodative, and has no reason to alter its policy path."