Eurozone inflation set to fall to 1.8% this month

Another week, another round of gently improving economic data in the eurozone – with one likely exception.

While confidence is on the rise and output in manufacturing and services motoring along, inflation is set to slow for the first time in almost a year as energy-price effects gradually peter out. The latest rush of numbers due from across the 19-nation region will probably bear out Mario Draghi’s view that the European Central Bank’s actions have largely been a “success,” though more stimulus is needed to make temporary improvements permanent.

Confidence that price pressures will eventually follow the steadily firming recovery has fuelled a debate about unwinding unconventional stimulus – no longer just among economists. Governing Council members have started to think about how to communicate an exit, cautioning at the same time that it is yet too soon to act.
Officials hold their next policy meeting on April 27, though a shift isn’t seen until at least June, when they will have new forecasts.

Inflation probably decelerated to 1.8% in March from 2% the previous month, according to a Bloomberg survey of 52 economists. While a slowdown won’t surprise the ECB, which predicted the rate would peak in the first quarter, it’s a reminder that price trends continue to be driven primarily by volatile components such as energy and food, with underlying pressures still subdued.

The report – due Friday – caps a week of data that will shed light on the health of the economy.A report by the Ifo institute showed business confidence in Germany improved more than forecast in March, climbing to the highest level since July 2011. As the euro zone’s largest economy, Germany’s fortunes are crucial to the outlook for the region. While quarterly growth has been somewhat erratic – often due to weather effects – gross domestic product increased 1.9% last year, the most since 2011. Economic confidence for the currency bloc as a whole is also improving, and a Purchasing Managers’ Index signalled on Friday that the economy is growing at a quarterly pace of 0.6%, which would be the strongest in two years.