Euro zone price rises cool significantly in March, but core inflation hits record high

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Inflation in the euro zone dropped significantly in March as energy prices continued to fall, while core expenses picked up to an all-time high.

Headline inflation in the 20-member bloc came in at 6.9% in March, according to preliminary Eurostat figures released Friday. By comparison, in February, headline inflation stood at 8.5%.

The main reason for this 1.6 percentage point fall was the drop in energy costs.

However, there’s other parts of the inflation basket that remain stubbornly high. Food prices contributed the most to the overall inflation reading of March.

Core inflation — which excludes volatile energy, food, alcohol and tobacco prices — rose slightly from the previous month. It reached an all-time record of 5.7% in March, from 5.6% in February.

Interest rates in sight

These figures do not give strong enough evidence that the European Central Bank might consider pausing its rate-hiking cycle, which started back in July.

“Policymakers at the ECB won’t read too much into the drop in headline inflation in March and will be more concerned that the core rate hit a new record high,” Jack Allen-Reynolds, deputy chief euro zone economist at Capital Economics, said in a note on Friday.

He added that the ECB is likely to keep raising rates despite the drop in the headline figure.

ECB Member Isabel Schnabel said Thursday that headline inflation has started to decline, but core inflation is proving sticky.

While last year’s energy price increases spread fast across the economy, they are taking longer to dissipate, “and it’s not even clear whether it’s going to be completely symmetric in the sense that everything is even going to drop out at all,” she said at an event Thursday, according to Reuters.

The ECB raised rates by 50 basis points in March, bringing its main benchmark rate to 3%. However, it did not give any indication of potential rate decisions in the months ahead.

Recent banking turmoil has raised questions about whether central banks have been too aggressive in moving interest rates to tackle inflation. ECB Chief Economist Philip Lane has said that more rate hikes will be needed to address high inflation if the banking instability dissipates.

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