Inflation in Germany drops again in March

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Last month, year-on-year inflation fell to 2.2%, partially attributed to a decline in energy prices. The question arises whether the European Central Bank will respond to this easing inflation by cutting interest rates.

Preliminary data from the federal statistics office revealed that German inflation saw a slight decrease in March, surpassing expectations, mainly attributed to a decline in energy prices.

In Europe's largest economy, inflation eased to 2.3% in March, marking its lowest level since June 2021. In February, German consumer prices, harmonized for comparison with other European Union countries, had increased by 2.7% year-on-year.

Economists closely monitor German inflation figures, given that the country releases its data a day ahead of the euro zone inflation data, scheduled for Wednesday.

"The combined message from the data in Germany, France, Italy, and Spain is that the euro zone headline harmonized inflation will undershoot the consensus this week significantly," stated Claus Vistesen, chief euro zone economist at Pantheon Macroeconomics.

According to a Reuters poll of economists, euro zone inflation is expected to remain at 2.6% in March, unchanged from the previous month.

The European Central Bank (ECB) has implemented the most substantial interest rate hike in the euro's history to counter double-digit inflation. ECB chief Christine Lagarde mentioned in March that the euro zone's inflation rate was poised to continue declining, while economic growth was anticipated to pick up during the year.

Euro zone consumers reduced their near-term inflation expectations in February, as indicated by a new survey conducted by the ECB, but projections for the future remained unchanged.

According to a statement by the ECB on Tuesday, these expectations are now at their lowest level since the beginning of Russia's unjustified war against Ukraine in February 2022.

An increasing number of ECB policymakers have expressed support for rate cuts, with the June meeting emerging as the most probable time for action. However, there is also a meeting scheduled for this month.

In March 2024, energy prices were 2.7% lower compared to the same month a year earlier. Additionally, it marked the first instance since February 2015 where food prices dropped below the level of the corresponding month of the previous year.

The inflationary trend is bolstered by a steady rise in services, with prices being notably influenced by a significant increase in wage costs.

"This reinforces our anticipation that the core inflation rate will stabilize comfortably above the ECB's target of 2% in the upcoming months," commented Solveen.