December 7, 2023


FRANKFURT – Eurozone inflation surged to an all-time high of 7.5 percent in March, further intensifying the European Central Bank’s policy challenge as it seeks to fight spiraling prices without hurting growth.

For months, inflation has raced ahead of the ECB’s target and is now more than triple the 2 percent seen as guaranteeing price stability. In February, annual inflation stood at 5.9 percent.

“The war in Ukraine has exacerbated some recent price dynamics,” said Oxford Economics economist Maddalena Martini. “The eurozone flash inflation reading surprised once again to the upside and confirmed the further acceleration.”

The sharp acceleration in prices was driven primarily by rising energy and food prices due to the war, preliminary Eurostat data showed Friday. Energy prices accelerated to 44.7 percent from 32.0 percent in February.

Core inflation, which strips out volatile components of food and energy, rose to 3.2 percent in March from 2.8 percent in the previous month. The core index is watched closely as the ECB’s gauge for medium-term price stability. 

Inflation was especially acute, hitting double digits, in four member states, with Lithuania leading the pack at 15.6 percent. The slowest rate was recorded in Malta, where inflation was up 4.6 percent. But even that’s more than twice the ECB’s target. 

Among the largest member states, inflation in German was up 7.6 percent, in France 5.1 percent, in Italy 7.0 percent and in Spain 9.8 percent. 

All signs point to a further acceleration in prices in the coming months. The Eurozone composite PMI last week showed both input and output prices surged at a record pace in March, while the European Commission Economic Sentiment indicator earlier this week reported that selling-price expectations for the next three months rose to unprecedented levels in all surveyed business sectors. 

As a result of the stronger-than-expected inflation data, the ECB will likely again have to revise up its inflation projections from the 5.1 percent seen in March.

ECB Vice President de Luis de Guindos said earlier this week that inflation “will continue rising over the next months,” with the peak expected in three or four months before slowing again. 

Meanwhile, financial markets are betting that a renewed upward revision to inflation will push the ECB into raising interest rates sooner rather than later. Money markets now price in 60 basis point hike by year end and see four quarter-point rate hikes by March next year. 

However, given the significant downside risks to growth stemming from the war and inflation, many economists think those market expectations are overdone. While energy price hikes are a temporary phenomenon that monetary policy can’t influence, weaker growth more broadly will dampen domestic price pressures — and that will make monetary intervention unnecessary, they argue. 

“We have two forces,” explained ECB Chief Economist Philip Lane in an interview with POLITICO earlier this week. “One is high current inflation, which runs the risk of creating its own momentum through second-round effects. On the other hand, if we see a significant downward revision in demand, that on its own terms will imply a downward revision for medium-term inflation.”

The relative strength of these forces will ultimately guide the ECB’s policy response, Lane said. 

As ING economist Bert Colijn put it, “the ECB is running out of painless options to battle current economic problems, so we expect it to tread carefully.”

This story has been updated.

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