Euro zone inflation seen easing to 3.4% in April

A poll of 45 economists showed a median forecast for euro zone inflation to ease to 3.4% in April from a record high of 3.6% hit in March. It is expected to dip because of base effects from a sharp rise last year in German tuition fees as well as a sharp increase in food prices at that time. But analysts are split on the outlook. Twenty-five of 45 see inflation easing to 3.4% or below, 17 see it dipping to 3.5%, while three see it holding at March’s level, or even increasing. Forecasts ranged from 3.2 to 3.7%.

A mild fall would not be likely to ease tensions at the ECB, which has an inflation ceiling of 2%, and might not loosen hawkish rhetoric from its policymakers. Economists are still forecasting rates to be cut twice by 25 basis points from the current 4.0% level in the second half of this year, but many have been pushing into the future the timing of those cuts or taking them out altogether.

In contrast, financial markets are pricing in a slim chance of a rate hike this year. “Following a string of upward surprises over the past few months, April’s figures are likely to prove relatively favorable,” said Luigi Speranza at BNP Paribas. He forecast inflation at 3.4%, but said risks were to the upside.

German inflation is also expected to ease in April to 2.8% from 3.1% in March when data is released on Monday. For Italy, economists see inflation nudging up to 3.4% from 3.3% in March. Data for Italy is also scheduled for release on Wednesday. But some see no let-up for inflation this month.  “Energy and transport prices likely edged up this month and we do not see any relief for inflation,” said Kenneth Broux at Lloyds TSB, who forecast it to hold at 3.6%. He said around a 10% increase in oil prices during April, as well as rising food prices, would counteract any downside base effects. “Inflation is not going to fall back to target this year and probably not next year. So it does not support any case for lower rates.”

Oil prices rose from around $100 a barrel at the start of the month to a record above $119 this week. They have since retreated only slightly to trade around $118. A separate poll this week showed inflation averaging 3.0% this year. Economists also see the European Commission’s Economic Sentiment index falling next week to 99.0 from 99.6 when data is released at the same time as inflation figures. (Reuters)