Eurozone consumer prices rose 2.2% year-on-year in April, according to EuroStat’s Flash estimate, which is the same as reading in March. More than expected.
However, core inflation, which shows prices without volatile components such as energy and food costs, rose 2.7% year-on-year in April, up from 2.4% in March.
“European inflation was 2.2% in April, surpassing forecasts, but still largely matched the European Central Bank’s target level,” said Michael Field, chief equity market strategist for Europe at Morningstar. But because of the risk of US tariffs, “every level of comfort we have here is unstable.”
“Unfortunately, in February and March, we’ve seen a rise in core inflation to 2.7%, which will move us further away from the ECB’s 2% target level,” Field says.
Service inflation has been surged, and energy prices have fallen
EuroStat estimates that the service had an annual increase of 3.9% year-on-year, up from the 3.5% reading in March. Food, alcohol and tobacco inflation rose 3% compared to 2.9% in March, while non-energy industrial products remained stable at 0.6%, while energy slowed at 3.5% compared to 1% slowing in the previous month.
Ricardo Marcelli Fabiani, a senior economist at Oxford Economics, says the Easter timing has driven service inflation. “This and food dig deeper into the negative realms of offset energy inflation,” he adds.
According to Fabiani, an increase in core inflation “should not raise concerns because the outlook reduces inflation and the temporary nature of the rise in services.” Oil prices and a stronger euro drop will reduce energy inflation, leading to cheaper production inputs and imports. He added that a blow to demand will put pressure on core inflation and accelerate wage growth.
Each month, in April, headline inflation (HICP) increased by 0.6%. This is the same as March, and core inflation increased by 1%, as in March.
How will a stronger euro affect inflation in the eurozone?
The euro has been strengthened by about 10% against the dollar since the start of the year. According to Goldman Sachs, a broad euro appreciation of 1% reduces the HICP and actual GDP headlines by about 0.1%, respectively. The impact on core HICP is also negative, but it is half the size of headline inflation.
In a report on May 2, the investment bank said, “We have found that euros and core inflation will be achieved within one year, respectively, with approximately 75% and 50% of the stronger euro cumulative effect each within one year,” and that the previous euro valuations will be deducted by 0.1-0.2 percentage points year-on-year for each of the next two years. “A further euro appreciation means a larger, more sustained drug against inflation.”
However, in the short term, inflation could move upwards again in Europe if trade war escalates. “The EU is currently formulating a response to Trump’s recent tariffs. They are wisely waiting until the end of the 90-day suspension, but any further escalation will see inflation moving rapidly again in Europe,” says Morningstar Field.
Will the ECB be cut in June?
The next European Central Bank monetary policy conference will be held in Frankfurt on June 5th, and the market expects a mitigation cycle to continue amid economic headwinds. The ECB cut key interest rates by 25 basis points on April 17 to 2.25%6 consecutive decreases in this cycle.
Goldman Sachs believes that three additional interest rate cuts will be at 1.5% terminal rates in June, July and September this year. This is because the Euro’s valuation this year is “large by historical standards, disproportionately skewed to the dollar, primarily the result of external drivers.” Terminal rates refer to the point at which the central bank stops cutting or raising cycles, which usually coincides with inflation being the target.
Morningstar’s field agrees with the possibility of more ECB reductions. “This relatively low level of headline inflation maintains the pressure of the ECB, which could further lower interest rates.
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