Euro inflation increases as the impact from the oil price decline fades

Euro deflation eased in March as the flash estimate for HICP inflation increased to -0.1% y/y from -0.3% y/y in February. The HICP inflation print was in line with consensus expectations, but core inflation surprised on the downside as it declined to 0.6% y/y in March from 0.7% y/y in February.

The higher headline inflation was mainly due to a smaller drag from energy price inflation. In monthly terms energy prices increased 1.9%, which lifted the inflation rate to -5.8% y/y in March from -7.9% y/y in February. The monthly increase in energy prices occurred even though the oil price measured in euro was almost stable in March. Instead it reflects the fact that gasoline prices, which are more important for energy consumer prices, have continued higher in March.

Food price inflation was also slightly higher at 0.6% y/y in March compared to 0.5% y/y in February. The increase was primarily due to positive base effects as food prices were unchanged on a monthly basis.

The decline in core inflation was due to a decline in service price inflation to 1.0% y/y in March from 1.2% y/y in February. Service price inflation, which accounts for around 60% of core inflation, is dependent on wage growth, but it is also affected by volatile components such as package tours. Inflation in package tours usually increases around Easter, and due to the timing of Easter in very early April, we had expected higher inflation on package tours in March. Based on the data released today, we expect the impact to be seen in April, where we expect core inflation will increase back to 0.7% y/y.

Inflation in industrial goods (non-energy), which accounts for the remaining 40% of core inflation, was unchanged at -0.1% y/y in March compared to February. However, in Germany, inflation in industrial goods increased to -0.8% y/y from -1.4% y/y, which could be a first sign that the weakening of the currency is starting to support inflation on industrial goods.

Overall, the figure released today supports our view that the negative impact from the decline in the oil price will fade and that inflation will increase sharply later this year. Even with an unchanged oil price at the current low level, we expect headline inflation will turn positive at the end of the year, as positive base effects will support energy price inflation.