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Inflation surprises in the Eurozone, why and what happens now?

Inflation falling in the Eurozone, with a result that surprised expectations in the March reading (preliminary).
Consumer prices rose 2.4% annually last month, down from 2.6% in February.
Analysts expected a rise of 2.5%.
The measure that excludes volatile items such as food and energy also fell more than expected, to 2.9%.
The report further demonstrates that policymakers are on track to bring inflation back to the 2% target, allowing them to soon loosen the grip of high rates that began with double-digit price increases.
President Christine Lagarde signaled a first cut in June, based on new forecasts and an update on wage growth in the first months of the year.
While rumors are also spreading about possible decreases in the cost of money in April, what do analysts observe about the – surprise – drop in prices in March.
Inflation surprise, how to (really) read the new European data? Consumer price growth in the 20 nations that share the euro currency slowed to 2.4% in March.
Core inflation, closely monitored by the ECB to gauge the durability of price pressures, meanwhile fell to 2.9% from 3.1%, falling below expectations for 3.0%, according to data from Eurostat, the EU statistical agency.
The only potential concern remains services inflation, which held steady at 4.0% as it has for months now, suggesting that relatively rapid wage growth is keeping prices in the sector under constant pressure.
While shipping disruptions in the Middle East have not affected inflation in Europe much and shocks are unlikely, though last week's bridge collapse in Baltimore – a key port for automakers and other manufacturers – has ignited new alerts, precisely the increase in wages in the Eurozone gives rise to uncertainty.
read also ECB, rate cuts already in April? Many doubts, few certainties in Europe Chief economist Philip Lane insists that wage rises must continue to decline for him to consider reversing monetary policy.
While a key pay indicator showed some moderation at the end of 2023, wages continue to expand by more than 4%.
This is supporting pricing pressure in services, where labor has a huge impact on final costs.
What can happen now in the Eurozone? At its meeting next week, the ECB is expected to acknowledge the improving outlook, but policymakers are unlikely to cut rates straight away, having repeatedly tipped June as the next crucial policy meeting.
This is why investors see almost no chance of a cut on April 11, but have fully priced in a move for June, followed by two or three more steps later this year.
Confusion, however, still dominates the context given that the French governor has not exactly ruled out a turning point already in the spring.
The ECB has been cautious so far about cutting rates because it expects inflation to return to the 2% target only next year, although some analysts have a more optimistic view, estimating the headline rate at around 2% by this time.
While oil prices have been steadily rising since the start of the year, crucial natural gas prices remain low after an unusually mild winter, pointing to slight but still manageable risks from energy costs in the coming months.
read also ECB can cut rates even with rising wages, statement Accommodative politicians, meanwhile, argue that weak economic growth curbs companies' pricing power and therefore eases inflationary pressures.
The ECB could therefore afford to loosen the brakes.

Author: Hermes A.I.

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