Inflation is really here! Driven by energy prices, Europe's CPI posts the fastest growth in four years.

Inflation is really here! Driven by energy prices, Europe's CPI posts the fastest growth in four years.

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Soaring energy prices are pushing overall inflation in the eurozone sharply higher, but shrinking demand has caused core inflation to unexpectedly slow, making the European Central Bank’s policy stance increasingly complex.

On Tuesday, March 31, Eurostat data showed that consumer prices in the eurozone rose 2.5% year-on-year in March, the highest level since January 2025. This represents a month-on-month jump of 1.9 percentage points, the largest increase since 2022.

However, core inflation, which excludes food and energy, unexpectedly slowed to 2.3%, below the market expectation of 2.4%, and service sector inflation also declined simultaneously.

After the data was released, officials from the European Central Bank made a series of remarks signaling a more hawkish policy stance.

Estonia’s central bank governor Madis Muller stated that the baseline scenario previously set with a cut-off date of March 11 “can now merely be seen as an optimistic scenario,” and clearly pointed out that “if energy prices remain high for a prolonged period, a rate adjustment in April cannot be ruled out.”

Slovakia’s central bank governor Peter Kazimir also warned that “the longer the Iran war lasts and the greater the destruction, the higher the risk of inflation, and the sooner and more decisively we need to respond.”

The main driver of this round of inflation is energy.

Goldman Sachs data show that in March, eurozone energy inflation rose to 4.9%, the main factor fueling the 2.52% year-on-year increase in the Harmonized Index of Consumer Prices (HICP).

By country, March inflation performances diverged significantly among member states.

Germany and Spain previously released data showing inflation rose to 2.8% and 3.3% respectively, both showing notable acceleration; France saw a pick-up but remained below 2%; Italy, unexpectedly, remained unchanged at 1.5%, showing no signs of heating up.

Goldman Sachs noted in its analysis that services inflation declined to 3.23%, in part due to the base effect from the drop in tourism and hotel industry components related to the Olympics in Italy.

Non-energy industrial goods inflation fell to 0.47%, below the bank’s forecast. On a seasonally adjusted month-on-month basis, core inflation in March was only 0.08%, much lower than February’s 0.33%, indicating that underlying price pressures have weakened in the short term.

Outlook Filled with Uncertainty; ECB Baseline Scenario May Be Outdated

The ongoing spread of Middle East conflicts is severely testing the ECB’s earlier policy projections.

The ECB previously projected average inflation for this year at 2.6%, but as oil and gas prices remain elevated, the credibility of this forecast is declining. In extreme scenarios, inflation could peak as high as 6.3% in 2027.

Goldman Sachs forecasts that eurozone core inflation will gradually decline after peaking at 2.5% in the third quarter of 2026, reaching 2.1% by the end of 2027; overall inflation is expected to average 2.9% in 2026, with a peak of 3.2% in the second quarter, and to fall to 2.0% in 2027.

The ECB stated that it will not allow a repeat of the uncontrolled inflation seen after the 2022 Russia-Ukraine conflict, emphasizing that it will act swiftly and decisively if necessary.

The ECB’s current focus is on preventing secondary effects, including excessive wage increases and companies raising prices, while closely monitoring how price transmission in fertilizers, food and other sectors affects inflation expectations among residents.

Central Bank Officials Speak Out

ECB officials have made a series of statements signaling a more hawkish policy stance.

Croatian Central Bank Governor Boris Vujcic stated that accelerated inflation expectations “fit with previous judgments”; Bank of Italy Governor Fabio Panetta emphasized that “closely monitoring expectations and preventing a wage-price spiral is crucial, while monetary policy actions must remain moderate.”

Bulgarian Central Bank Governor Dimitar Radev issued a warning from a longer-term perspective, noting that past inflation shocks have left a “lasting mark” on European consumers’ psyches: “Factors previously seen as external shocks are now directly feeding into inflation expectations, energy prices, financing conditions, and overall confidence.”

In a speech on Tuesday, he pointed out that the risks facing the inflation outlook are “not only elevated” but also “asymmetric and closely tied to geopolitical developments.”

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