Societe Generale economists anticipate a sharp rise in Euro area headline inflation for March, primarily driven by higher energy costs. The headline inflation is expected to increase by 0.8 percentage points to 2.7% year-on-year, while core inflation is projected to ease slightly by 0.1 percentage points to 2.3% year-on-year, according to the latest analysis and Spanish data already released [1]. The ongoing energy shock is cited as the main factor behind the March inflation increase [1].
National business surveys, including Ifo, INSEE, and ISTAT, have shown a modest decline in business confidence, attributed to weaker expectations. However, these surveys still indicate continued positive growth. Societe Generale notes that it may be too early for these surveys to fully reflect the impact of the recent rise in energy prices, as most were conducted in the first half of March. If the Middle East conflict persists, April surveys are expected to reveal more pronounced negative effects [1].
The ECB has reinforced its hawkish stance, preparing for potential small 'insurance' rate hikes as it closely monitors PMIs, European Commission surveys, and bank lending data to assess second-round effects and growth risks. With inflation at target and expectations well anchored, the ECB is positioned to adjust policy as needed, while the current economic backdrop remains benign. The energy-price shock is noted to be smaller than in 2022, with the ECB synthetic energy price index rising by 50% compared to 90% in 2022, largely due to lower gas prices [1].
Looking ahead, Societe Generale highlights the significant challenge facing the ECB and other developed-market central banks in detecting the transmission of the energy-price shock through indirect channels and its effects on wage growth. Uncertainty surrounding the war and energy prices remains high, suggesting potentially difficult discussions at upcoming ECB meetings and increased focus on downside growth risks. For now, the ECB appears to be preparing for small 'insurance' hikes [1].
CONCLUSION
Euro area inflation is set to rise sharply in March, prompting the ECB to maintain a hawkish stance and consider small 'insurance' rate hikes. While the energy shock is less severe than in 2022, ongoing uncertainty around geopolitical events and energy prices could pose challenges for growth and monetary policy in the coming months.