Shoppers in Bad Honnef, near Bonn, Germany
Shoppers leave a supermarket in Bad Honnef, near Bonn, Germany. Core eurozone inflation, which excludes energy and food prices, fell month-on-month © Reuters

Inflation in the eurozone has jumped to its highest level since the start of the pandemic, but it was driven by one-off factors that will fade next year, rather than underlying price pressures, according to the European Central Bank.

The harmonised index of consumer prices in the 19-country bloc rose to 1.3 per cent in March, according to a flash estimate published by Eurostat on Wednesday — in line with analysts’ expectations and up from 0.9 per cent the previous month.

That is the fastest rate of price growth since before the coronavirus pandemic hit Europe just over a year ago, but it remains below the ECB’s target of just under 2 per cent. Core inflation, which excludes more volatile energy and food prices, fell from 1.1 to 0.9 per cent. 

The rise in overall prices reflects one-off factors such as the reversal of a German value added tax reduction at the start of this year, increasing energy costs, and changes to the weighting of products and services used to calculate inflation.

ECB researchers estimated that changes in the weighting of the inflation basket to adjust for the pandemic’s impact on spending had added about 0.3 percentage points to Eurostat’s harmonised index of consumer prices since the start of the year.

Line chart of Annual change in harmonised index of consumer prices (%) showing Eurozone inflation rebounds to highest level since pandemic hit

“We know that in the short term inflation is going to rise, there are some technical temporary factors that are going to lead to upward price pressures,” Christine Lagarde, president of the ECB, said on Wednesday.

“But we are going to see through that because these are not underlying fundamental factors that will increase prices in a consistent and convergent fashion,” Lagarde told Bloomberg TV. “Given the distance relative to the aim that we have . . . I think it is going to be quite a while before we actually have to ask ourselves whether we need to tighten [monetary policy] at all.”

Investors expect inflationary pressures to increase as the world rebounds from the pandemic, and the ECB has forecast that eurozone inflation will rise from 0.3 per cent last year to 1.5 per cent this year, before dropping to 1.4 per cent by 2023.

Inflation in Germany neared a two-year high at 2 per cent in March, up from 1.6 per cent in February, while in France it rose from 0.8 to 1.4 per cent and in Spain it increased from minus 0.1 per cent to 1.2 per cent, according to data from national statistics agencies. Italy was one of the few countries where inflation fell, going from 1 per cent to 0.6 per cent.

The German central bank has predicted inflation is likely to exceed 3 per cent later this year, but there have been few signs of rapid wage inflation in the economy, which remains weighed down by restrictions to contain rising coronavirus infections.

IG Metall, the country’s biggest union, this week agreed a pay deal in the important industrial region of North Rhine-Westphalia. The deal, which provides a benchmark for IG Metall workers in the rest of the country, amounted to an annual pay rise of about 1.3 per cent. That was below the union’s initial demand but above last year when its workers’ pay was frozen. 

“This confirms our assumption that the pandemic will put the brakes on wage growth for some time and thus also prevent a sustained rise in inflation,” said Eckart Tuchtfeld, senior economist at Commerzbank.

German jobless numbers dipped by 8,000 to 2.8m in March, according to data from the federal employment agency on Wednesday. The unemployment rate was unchanged at 6 per cent, up from 5 per cent a year ago. However, the jobless figures do not include the Kurzarbeit furlough scheme, which paid subsidised wages to 2.9m people in January.

“We continue to see considerable slack in the labour market once the furlough schemes end, which should dampen any wage pressures,” said Morgan Stanley economists in a note, citing the “relatively modest” IG Metall wage deal.

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