

Market Analysis
Euro zone inflation decelerated across the board last month, strengthening expectations for a forthcoming interest rate cut by the European Central Bank in June. Final data from Eurostat, released on Wednesday, revealed this trend, despite the clouded outlook posed by escalating energy costs and a weakening euro.
Inflation in the 20 euro zone nations eased to 2.4% last month from 2.6% in February, aligning with an earlier preliminary estimate. Concurrently, underlying price growth, which excludes volatile food and energy prices, dipped to 2.9% from 3.1%, despite services inflation remaining stubbornly high at 4.0%.
The rapid decline in inflation over the past year has paved the way for anticipated interest rate cuts starting in June, although forthcoming months may witness erratic price growth data, prolonging the return to the 2% target.
The euro zone grapples with conflicting inflationary pressures, likely to keep the headline rate fluctuating around current levels before tapering towards 2% in autumn.
Factors contributing to downward inflationary pressure include decelerating wage growth, subdued demand amid an almost recessionary environment, tightened fiscal policies, influx of low-cost imports from China, and relatively modest gas prices following a mild winter.
Conversely, escalating oil prices and a depreciating euro exert upward pressure on prices, while persistent service costs pose a risk of prolonged elevated underlying price growth.
TS Lombard noted, "The recent uptick in commodity and energy prices will contribute to headline inflation in the upcoming months, compounded by euro/dollar depreciation driven by Fed-ECB policy divergence."
While the euro has depreciated about 4% against the dollar since the year's commencement, economists suggest that the trade-weighted euro has weakened to a lesser extent, mitigating the impact of exchange rate fluctuations.
ING commented, "For now, the ECB's primary concern isn't the weakened euro but rather the surge in oil prices and potential escalation of conflicts in the Middle East, causing concerns for at least the ECB hawks."
Policymakers maintain that oil price and exchange rate fluctuations are insufficient to fundamentally alter the inflation outlook. Nonetheless, market expectations for ECB rate cuts continue to recede.
Investors now anticipate only a 75 basis point rate cut this year, equivalent to two adjustments post-June, a decline compared to two months prior, when between 4 and 5 cuts were anticipated.
Energy has exerted significant downward pressure on inflation throughout the year due to high figures from the previous year affecting base figures. However, this trend may reverse in the latter half of the year if oil prices continue to rise.
Some argue that the traditional correlation between oil and gas prices has dissolved, suggesting that a rise in oil prices may not automatically elevate natural gas prices and exert the same upward pressure on inflation as previously observed.
Paraphrasing text from "Investing" all rights reserved by the original author.