The battle to bring inflation below the 2% target is still long for the European Central Bank (ECB), which is expected to continue its rate hikes.

The risk is that it slows down the economy too brutally, by restricting credit, and destabilizes the banking sector after the bankruptcy of the US bank SVB and the rescue of Credit Suisse.

Annual inflation in the euro zone fell in March for the fifth consecutive month, more sharply than expected by experts polled by Factset and Bloomberg who expected an average of 7.1%, and after 8.5% in February.

The rise in consumer prices, published by Eurostat, reached a record high in October, at 10.6%, after a year and a half of uninterrupted increases, accelerated by the war in Ukraine.

The improvement in March was mainly due to a slight decline in energy prices from the very high levels they reached a year ago, after Russia's invasion of Ukraine.

Energy prices (fuel, electricity, gas, etc.) fell by an average of 0.9% over one year, their first decline in a year. They were still up 13.7% in February and the sectoral increase had peaked in October with a jump of 41.5%.

Inflation in the euro © zone / AFP

The bad news, however, comes from food prices, whose rise accelerated to 15.4% in March, after 15% in February.

Adjusted for volatile energy and food prices, so-called "core" inflation, more representative of long-term trends, rose again to 5.7% in February, a record level well above the 2% inflation ceiling set by the ECB.

Industrial goods inflation slowed to 6.6% (-0.2 points in comparison with the previous month). But service tariffs rose 5 percent, 0.2 percentage points higher than in February.

Towards wage increases?

"Core inflation remains a concern for the ECB (which) will continue to raise short-term rates," said Bert Colijn, an economist at ING Bank. It expects an increase of 25 basis points in May and again in June.

Jack Allen-Reynolds, an expert at Capital Economics, agrees. "ECB policymakers will not dwell too much on the decline in headline inflation in March and will be more concerned that the underlying rate has reached a new record," he said.

The expert expects energy prices to fall further in the coming months, as well as a slowdown in food prices and headline inflation in the euro area. But he worries about possible wage increases that could fuel higher prices for services, in a context of tight job market.

Eurostat announced on Friday a stable unemployment rate in February at 6.6% of the working population, its lowest historical level in the 20 countries sharing the single currency.

The ECB has already raised its key interest rates by 3.5 percentage points since July and does not intend to stop there, despite the recent turmoil affecting the banking sector and very weak growth forecasts for this year.

ECB President Christine Lagarde during a hearing at the European Parliament in Brussels, March 20, 2023 © John THYS / AFP/Archives

The United States will also publish on Friday one of the inflation indexes, the PCE, which should have slowed slightly in February compared to January, 5.1% against 5.4%, according to forecasts from the Cleveland Fed. This measure of inflation is the one favoured by the US central bank (Fed) which, like the ECB, has set a target of 2%.

The CPI index, another benchmark measure of inflation to which pensions are indexed, fell in February to 6.0% year-on-year, its lowest level in a year and a half.

The Fed is also determined to bring inflation back into line through rate hikes, but the crisis in the banking sector is prompting caution. This crisis leads to a tightening of credit conditions that is equivalent to a rate hike, Fed Chairman Jerome Powell said.

© 2023 AFP