Inflation fell rapidly in two of Europe’s largest economies in March after a sharp drop in energy costs despite rises in the price of other goods and services.
German consumer prices rose 7.8 per cent year-on-year on a harmonised basis — down from the previous month’s rate of 9.3 per cent, but higher than the 7.5 per cent forecast by economists polled by Reuters.
The figures came hours after Spain’s annual inflation rate almost halved to 3.1 per cent for March, from 6 per cent the previous month.
Euro area government bonds sold off after Germany’s inflation figures were published. Yields on German two-year debt rose 0.13 percentage points to 2.8 per cent as investors bet that borrowing costs in the eurozone would rise further.
Economists said the fact that core consumer price inflation — which excludes energy and food prices to give a better indicator of underlying price pressures — rose in Germany and fell only slightly in Spain meant the European Central Bank was likely to have to raise interest rates when it meets in May.
“Core inflation looks likely to be stickier,” said Silvia Ardagna, an economist at UK bank Barclays.
The ECB has raised interest rates swiftly in response to a surge in inflation over the past year, raising its benchmark deposit rate from minus 0.5 per cent last summer to 3 per cent.
Some members of the governing council have called for the bank to adopt a more cautious approach after raising interest rates by half a percentage point this month.
The turmoil in the banking sector has also opened up the prospect of a potential credit crunch that could slam the brakes on both inflation and growth in the coming months.
However, some council members argue that the ECB needs to discount the sharp swings in energy costs and focus on underlying price pressures.
Isabel Schnabel, the most hawkish member of the ECB executive board, told an event in Washington late on Wednesday that core inflation had proved more sticky than expected and this “causes some headaches for central bankers”.
Headline eurozone inflation figures are due on Friday and are also expected to fall as the base effects of last year’s surge in energy prices, triggered by Russia’s invasion of Ukraine, drops out of the index.
Spain served as a leading indicator during the gas-driven rise in prices last year, as its energy prices responded faster to wholesale market moves than other countries.
By contrast, Germany’s use of longer term contracts has made wholesale price falls slower to filter through.
Still, German energy inflation fell rapidly from 19.1 per cent in February to 3.5 per cent in March, according to Destatis, the federal statistical office. Berlin’s partial cap on household gas and electricity bills also contributed to the decline, it said.
Food inflation accelerated slightly to 22.3 per cent from 21.8 per cent in the year to February. Services inflation rose to 4.8 per cent, from 4.7 per cent.
Holger Schmieding, chief economist at investment bank Berenberg, said German inflation was boosted by a big jump in package holiday prices, which rose almost 13 per cent in the most populous region of North Rhine-Westphalia. “Post-pandemic, Germans just love to travel, while hotels struggle with higher heating bills and shortages of personnel,” he said.
In Spain, the 3.1 per cent year-on-year rise in harmonised consumer prices was below consensus estimates of a 4 per cent increase. Spanish core inflation, however, remained stubbornly high at 7.5 per cent year on year.
Additional reporting by George Steer