Core prices in the Eurozone are expected to fall slightly in March while headline inflation is expected to rise, and continue to rise, as oil prices stabilize and the impact of the massive decline in energy prices that started in 2014 begins to fade.
Headline inflation, or the Harmonized Index of Consumer Prices (HICP), which includes the volatile components of food, energy and alcohol and tobacco, is expected to have fallen 0.1 percent in March, up from -0.3 percent in February.
“What we see is that in the past few months, oil prices have obviously been lower and have depressed the energy component of inflation,” said Teunis Brosens, who is a Senior Economist at ING Bank NV in Amsterdam. “What we saw in March is that fuel prices had already picked up a bit so you see the negative contribution of energy prices to inflation has diminished in March and that’s basically causing inflation to go up.”
Energy prices are expected to fall 5.8 percent, up from -7.9 percent in February.
Though many economists predict headline inflation to turn positive by the end of the year due to the expectation of a continued rise in energy prices, the expected drop in core inflation for March would dampened the excitement that the rise in energy prices and the early effects of the European Central Bank’s quantitative easing has given the euro area and its hopes for inflation.
“The contribution from oil is going to be a positive base effect starting sometime in July on inflation dynamics,” said Anna Grimaldi, a Senior Economist at Intesa San Paolo. “But what really matters is whether core inflation goes up or not.”
The expected rise in core inflation of 0.6 percent in March would match the record low set in January. It would be down from 0.7 in February and 1 percent a year ago.
“Core inflation is the best gauge for underlying price developments,” Brosens said. “What we have seen is that it has been falling over the past few months. We expect it to remain at 0.6 percent for March.”
Many economists predict the reason for the expected minute decline in core prices is due to a decline in service price inflation, which is dependent on wage growth. Service price inflation is expected to have fallen 1 percent, down from 1.2 in February.
According to Brosens, core inflation will also have to move back to close to 2 percent—the target level of inflation for the ECB and its QE program—and any potential threats to the euro area inflation recovery will be shown through this figure.
“Should it fall further, that would really be a reason for worry because then it would be a sign that a deflationary spiral is getting a hold on the Eurozone economy,” he said. “This is not something that we expect, but we are watching core inflation closely because if there is any danger left for a deflationary season here then it should show up in core inflation.”