Inflation: Getting more confidence to deliver rate cut in June

Euro area HICP headline inflation came at 2.4% yoy in March, decelerating by 0.2 point from February (AXA IM and Consensus was at 2.6%). Core HICP inflation was also lower at 2.9% yoy (AXA IM: 3.1%; Consensus: 3%). 

Within core inflation, non-energy industrial goods came at 1.1% yoy, below our forecast (1.6%). We had anticipated a soft rebound in clothes prices after sales period but it has been even softer (only proxied by Italian data at this stage). More broadly, we are not seeing any pressure from supply disruption that occurred in the Red Sea. 

Services prices came at 4.0% yoy, the same level for the fifth consecutive month and in line with our estimate. Despite a miss on French services inflation that surprised on the downside, it has been compensated by stronger services inflation elsewhere. We are awaiting final estimates published by Eurostat on 17 April to better isolate the impact of Easter but preliminary details available in Italy, Belgium and Landers in Germany are showing that the effect was probably softer than initially planned. But that means other services stayed strong. We believe the upside surprise on services inflation excluding items impacted by Easter is marginal and does not represent a threat for near term trajectory. 

Food, alcohol and tobacco inflation decelerated again and reached 2.7% yoy (from 3.9% in February), in line with our forecast. Energy inflation came at -1.8% yoy (from -3.7% in February) while we were pencilling in something around -1.3%.

Looking forward, core disinflation will remain very gradual in the near term (excepted in April with the normalisation of Easter impact), but it should decelerate faster by the end of the summer as services prices should start to ease more markedly. It is consistent with latest European Commission surveys on selling price expectations which signalled less people anticipating higher prices in March than in February. We would need to see some confirmation of this but it is usually a good proxy of underlying price pressure in 3 months horizon. We have core inflation landing at 2% in Q1 2025.

We believe risks remain tilted to the upside. In the near term, energy prices can fuel a rebound in inflation while services inflation are yet to engage in disinflation phase. On energy prices, the timing of any rises would matter as the impact would be different if it occurs now (with core inflation just below 3%) or in 6 months (core forecasted at around 2.3%). 

Our long-held view of a first ECB rate cut in June is reinforced, with decelerating headline and core inflation. Even if the Fed were to postpone its first cut to July, as currently priced by the market (AXA IM baseline still has a 25-bps cut in June), we think conditions are aligning for a start of the easing cycle in the euro area next June with tamed inflation pressures (also on forward looking basis) going hand in hand with anaemic growth. Today's data should also help reinforce the consensus formation within the Governing Council.