Economics

Eurozone inflation falls further than expected

Bigger than expected drop marks the peak in eurozone inflation and should calm ECB hawks.

31 March 2017

Azad Zangana

Azad Zangana

Senior European Economist and Strategist

The flash estimate for eurozone inflation showed a fall in the annual rate from 2% to 1.5% in March – a much larger drop than consensus expectations (1.8%). The sharp fall should mark the end in the recent surge in inflationary pressure, as we forecast inflation will fall further towards 1% by the end of this year.

Headline inflation, based on the harmonised index of consumer prices (HICP), had been rising in recent months. The drag from energy prices over most of 2015 and 2016 finally fell out of the annual comparison, creating base-effects that raised the annual rate. Indeed, when focusing on the core rate of inflation (excluding energy, food, alcohol and tobacco), annual inflation remains low at just 0.7% - down from 0.9% from a month ago.

The recent rise in eurozone inflation was always seen as a temporary pick-up, but with the annual rate rising above the European Central Bank’s (ECB) target of close to but below 2%, the tone of the governing council started to shift in a more hawkish direction. Indeed, at least one member suggested that interest rates could rise soon, and even before the ECB’s quantitative easing programme was ended. This caused short-term money market interest rates to rise and for the euro to strengthen. However, with inflation now likely to head lower, ECB hawks are likely to retreat for the time being. At the time of writing, government bond yields in the eurozone and the euro have fallen slightly in reaction to the latest data.

Important Information: This communication is marketing material. The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change.  To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 31 Gresham Street, London, EC2V 7QA. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.