Services inflation is breaking lower, notwithstanding Easter distortion

Eurozone inflation edged lower in March according to the flash estimate, with headline moving down to 2.2% from 2.3% in February, and core down to 2.4% from 2.6%. The headline move was in line with consensus and our forecast, while core was in line with our forecast but below consensus. As we had expected, the fall in core inflation was driven by a relatively sharp drop in services inflation to 3.4% from 3.7% in February – likely partly due to the different timing of Easter, which was at the end of March last year, while this year it is in mid-April. Easter tends to push up prices of holidays, restaurants and hotels, and is almost always a distorting factor that is statistically difficult to adjust for. Following the downward distortion in March, we expect services inflation to pick up again in April. Big picture, services inflation is beginning to break lower from the elevated rates we have seen post-energy crisis, as wage growth softens (albeit from high levels), productivity picks up, and the cooling demand for services pressures businesses to partly absorb high wage growth into their margins.

Looking at other categories of inflation, energy prices were expectedly the main driver of the fall in headline inflation, with both the fall in oil prices feeding through to petrol prices and household energy bills seeing some relief from the drop in wholesale gas and electricity prices. Goods inflation was stable at relatively subdued levels (0.6%; has been sub-1% for 12 months in a row). Food, alcohol and tobacco inflation (which are only reported collectively in the flash estimate) edged up to 2.9% - the upper end of the range of the past year.

Tariffs unlikely to push inflation significantly above ECB target

Looking ahead, with wage growth continuing to soften, we expect services inflation to continue its slow, gradual normalisation. Headline inflation may pick up a touch in the near term on the back of the recent rebound in oil prices, although further out we expect oil to be a drag on inflation due to the looming tariff hit to global trade and global growth. Assuming no meaningful retaliation to US tariffs, inflation would undershoot the ECB’s 2% target by the turn of the year, though there are growing signs that retaliation (and the scale of tariffs themselves) could be bigger than we currently anticipate. Still, given the US’s relatively small share of eurozone goods imports (c13%), even a broad-based retaliation would likely merely offset the downward impact from a hit to oil prices rather than push inflation meaningfully above the ECB’s target.

Governing Council seems to be building to an April pause

Our base case nonetheless sees the ECB pausing at the April meeting, as we think the Governing Council is likely to want to wait until staff have updated forecasts in June before proceeding with rate cuts. This could be a close call, though markets are moving in our direction. While markets had priced as much as a 85% probability of an April cut late last week, reports that Governing Council members are actively considering a pause has since reduced that probability to 65%.

The Netherlands: Inflation shows only a marginal decline

Dutch inflation (CPI) came in at 3.7% y/y for March, slightly higher than our forecasted 3.4%. Despite the marginal decline from 3.8% y/y in February, inflation remains elevated, primarily driven by increased services inflation. This is largely due to higher rent indexation linked to wages and inflation, along with persistently high wage growth, although gradually declining.

Industrial goods prices came in slightly higher than we had anticipated. While the complete breakdown is not yet available, contributing factors likely include increased energy and wage costs, coupled with rising goods consumption. On the other hand, energy prices continued to exert downward pressure on the inflation figure. Food prices came in at 7.1% y/y, down from 7.5% in February. The increased tobacco duties still play a significant role in food prices. The effect is expected to gradually diminish from June, slightly later than the initial increase in April last year since stockpiles could still be sold at the old price, meaning that the effect becomes visible later and more gradual.

We are currently revising our inflation forecasts, also following Trump’s expected tariff announcement on the 2nd of April. Generally, we expect Dutch inflation to gradually decline but remain above the ECBs 2% target as well as above the inflation rate in the eurozone aggregate. Three factors contribute to this. Firstly, the higher inflation peak in 2022 leads to a more significant wage catch-up in the Netherlands, resulting in larger second-round effects on services prices. Secondly, expansive fiscal policy contributes to inflation. Finally, planned tax increases in 2026, such as on hotels, recreation and fuel duties, exert upward pressure on the inflation figure.