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Eurozone inflation lower than expected, as energy costs drop

March 31, 2023

Inflation in the Eurozone slowed sharply to 6.9% in an unexpected turnaround after months of steady increases.

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Germany food fruit vegetable supermarket
Inflation in eurozone had gropped to 6.9%Image: Wolfgang Maria Weber/imago images

The 20 countries that make up the Eurozone recorded slowed inflation rates, although food prices rose with energy prices falling official, European Union's statistics agency revealed on Friday.

Consumer prices in the Eurozone rose by 6.9% in March, but that represented a decrease from 8.5% in February, the data showed.

Nevertheless, food, alcohol, and tobacco prices rose by 15.4% faster than the previous month's 15%. This means European consumers must still pay more for these essentials.

According to Bert Colijn ING senior eurozone economist, "this indicates that price pressures remain high for the moment, although this should improve in the coming months."

However, energy prices fell by 0.9%, an abrupt change of direction after rising to double-digit rates over the past year.

Russia's invasion of Ukraine sent oil and gas prices soaring last year but they have become more stable in recent months, helped also by mild winter.

According to data by European Union statistics agency Eurostat, consumer prices  dropped from 8.5% recorded in February to 6.9% in March.

It is the lowest rate recorded in a year.

Inflation falling

On both sides of the Atlantic, investors are focusing on inflation to gauge next steps central banks will take.

Bloomberg and financial data firm FactSet had forecasted the inflation rate to reach 7.1% in the Eurozone in March.

Despite falling from a peak of 10.6% in October, the rate remains high above the European Central Bank's (ECB) 2% target.

Central banks must be careful balancing  taming inflation with interest rate rises. More hikes risk to hurt the banking sector.

The ECB has raised interest rates repeatedly to tame red-hot inflation but the size of the next rate hike is unclear after recent turbulence in the banking sector.

Eurozone's core inflation, which excludes volatile food and energy prices has however raised to 5.7 in March from 5.6% in February.

This has created fears over price growth.

"The potential for core inflation to remain stickier than hoped will be the main reason for the ECB to continue to hike in the near term. We expect another 25bp hike in May and another in June," ING's Colijn said in a note.

 In Germany, annual price growth slowed to 7.4%in March from 8.7% in the first two months of 2023.

dmn/jcg (AP,AFP)