DWS: Core inflation eurozone remains problem child
DWS: Core inflation eurozone remains problem child
Core rate remains problem child, ECB to remain data independent, not date dependent.
‘It is good news that headline inflation in the euro area continued to fall in February,’ DWS reacts today. ‘It now stands at 2.6%, as pressure on food prices in particular has eased considerably. However, they still rose by 4.0%, after 5.6% in January. However, the core rate remains the problem child. It fell only slightly from 3.3% in January to 3.1% in February. While the increase in the price of consumer goods continued to fall (February: 1.6%), the price of services fell only slightly, from 4.0% to 3.9%, still showing that underlying inflation pressure is still relatively strong. Given the high wage dependency, developments in this area are of particular interest for the ECB. However, compared to the ECB's December projections, the inflation performance is somewhat better than expected, which should be reflected in a downward revision of the ECB's inflation projections for 2024.
Today's inflation data does not change our view on the ECB's monetary policy, but it does show that the ECB should remain cautious. As the eurozone economy tends to stabilise, wage developments will be crucial for the timing of the first rate cut. Our impression is that the majority of ECB members currently favors a first rate cut in June. By then, more inflation and wage data will be available to assess with greater confidence that inflation is moving towards the 2% mark. By referring to ‘more data’", the ECB is unlikely to pre-judge the timing of a possible rate cut at the March meeting. On the contrary, ECB President Lagarde will reiterate her mantra of being data-dependent rather than date-dependent. In our view, the central bank is likely to cut the deposit rate for the first time by 25 basis points in June, followed by two more gradual cuts. By the end of 2024, we expect the deposit rate to be 3.25%.’