Euro area: Inflation jump and hawkish ECB stance – Societe Generale

Societe Generale economists expect Euro area headline inflation to rise sharply in March, driven by higher energy costs, while core inflation eases slightly. They note the European Central Bank (ECB) has reinforced a hawkish bias, preparing potential small insurance hikes as it monitors PMIs, European Commission (EC) surveys and bank lending data to gauge second‑round effects and growth risks.

Inflation spike and ECB reaction function

"Attention will turn to the March flash inflation release. With Spanish data already out, we expect euro area headline inflation to rise by 0.8pp to 2.7% yoy, while core inflation should ease slightly by 0.1pp to 2.3% yoy. The ongoing energy shock is clearly the main driver of the March increase."

"A batch of national business surveys (Ifo, INSEE, ISTAT, etc.) delivered a similar and modest hit to business confidence, driven by weaker expectations, while still pointing to continued positive growth. It is likely too early for these surveys to fully capture the impact of the recent rise in energy prices, as most were conducted during the first half of March. If the Middle East conflict does not ease, April surveys are likely to show more noticeable negative effects."

"With inflation at target and expectations well anchored, the ECB remains well positioned to adjust policy carefully as needed, while the economic backdrop appears benign — a view we share (see our Macroblog What could make the ECB hike in June?). Moreover, so far, the energy‑price shock is smaller than in 2022 (the ECB synthetic energy price index increase stands at 50% vs 90% in 2002, mostly due to lower gas prices)."

"The coming weeks and months will present a significant challenge for the ECB — and other developed‑market central banks — as they try to detect, as early as possible, the extent and speed of the transmission of the current energy‑price shock through indirect channels and second‑round effects on wage growth. With uncertainty around the war and energy prices still exceptionally high, we do not exclude increasingly difficult discussions at upcoming meetings, with greater attention to downside risks for growth. For now, however, the ECB appears to be preparing for small “insurance” hikes."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)