Over the past 24 hours the European Central Bank has received a couple of pieces of rather unwelcome data.We can start with what is its modus operandi.
Euro area annual inflation is expected to be 2.5% in March 2026, up from 1.9% in February according to a flash estimate from Eurostat, the statistical office of the European Union.
One of the problems of producing a flash inflation number is that you get the bad news first and that is where the ECB finds itself. The detailed breakdown is below.
Looking at the main components of euro area inflation, energy is expected to have the highest annual rate in March (4.9%, compared with -3.1% in February), followed by services (3.2%, compared with 3.4% in February), food, alcohol & tobacco (2.4%, compared with 2.5% in February) and non-energy industrial goods (0.5%, compared with 0.7% in February).
I doubt any of you are surprised that the main swing factor here has been energy costs and prices. That is quite a move from -3.1% to 4.9% and yet again we see a clear failure for the central banking strategy of concentrating on what they call core inflation which ignores food and energy. As we stand we are already seeing energy inflation and with the news on fertilizer and energy prices are expecting food inflation to be on the march soon. Thus the type of analysis below misses the target.
Euro area HICP flash estimate came in below expectations, with both core goods (-23bp) and services inflation (-13bp) down in March. Early days, focus will be any signs of second-round effects, etc etc. ( @fwred)
What I mean by that is even in a world which has sped up it is too early for second round effects and the likes of services inflation.
If we switch to the monthly numbers we see a 1.2% rise expected for March driven by a 6.8% rise in energy costs.Along the way we can note that even after all these years the economic convergence they promised has morphed into
Croatia reported the highest annual #inflation rate in the euro area in March 2026, of 4.7%, (Europe Data)
Year-on-year, the harmonized index of consumer prices is projected to rise by 1.9% in March 2026, following a 1.1% increase in February. ( France Insee)
Manufacturing Inflation
This morning we have been reminded of this from an area that we know ECB President Christine Lagarde pays particular attention to the purchasing managers index or PMI.
Manufacturing input prices rise at fastest rate since October 2022.
That is not the headline she will have been looking for and there is more unwelcome news in the detail.
The most notable developments were on the supply-side of the economy. March survey data signalled the greatest lengthening of input lead times in just over three-and-a-half years as the war in the Middle East disrupted global logistics markets. Eurozone manufacturers raised their purchasing activity for the first time since June 2022, even though input price inflation soared to a 41-month high.
So there was a supply crunch and higher prices to boot.
Manufacturing companies in the euro area reported a considerable rise in their input prices during March. The rate of input cost inflation accelerated sharply on the month to reach its highest since October 2022. The price of goods leaving the factory gate were subsequently raised more aggressively, with the pace of increase at just over a three year high.
Somehow along the way they have managed to record an improvement in the manufacturing PMI for March.
S&P Global Eurozone Manufacturing PMI at 51.6 (Feb: 50.8). 45-month high.
Actually in the detail they are less sure and anyway those who follow my work will now the numbers are not accurate to 0.8
What happens next?
The next section can have a soundtrack provided by The Automatic.
What’s that coming over the hill?
Is it a monster? Is it a monster?
What’s that coming over the hill?
Because we received this.
An indicator of where people see prices in a year’s time increased to 43.4 from 26.2 in February, the European Commission said Monday in its monthly business and consumer survey. Managers’ selling-price expectations also rose “sharply,” particularly in industry.
“Selling-price expectations moved further beyond their long-term average in all business sectors,” the commission said.
This is really rather awkward for another of the themes that have been pursued by central bankers in their Ivory Towers which is that inflation expectations are much more important that actual inflation.
Financial market participants, too, expect a considerable and lasting decline in inflation in 2022 (Slide 11). There is no evidence that markets, or professional forecasters, expect runaway inflation, or inflation dynamics even remotely similar to what we observed in the 1970s.
That was Dr.Isabel Schnabel of the ECB speaking in Frankfurt on the 17th of November 2021 as inflation was rising. She went further that day.
Over time, a clear commitment to price stability has anchored inflation expectations at very low levels.
Her message was don’t worry about interest-rates.
meaning that the conditions for raising interest rates, as set out in our forward guidance, are very unlikely to be met next year.
In fact ahead of the biggest inflation surge for decades she appeared more worried about it being too low.
Our forward guidance provides protection against the risks of too low inflation by setting clear conditions that prevent a premature tightening.
We may already be seeing something of a pivot on the inflation expectations issue.
FRANKFURT, March 27 (Reuters) – The European Central Bank should not rush to raise interest rates to combat a surge in inflation and should instead take time to analyse whether the jump is becoming entrenched, board member Isabel Schnabel said on Friday.
Let’s see if she sticks to her view that inflation expectations are paramount or whether it was just another excuse.
An alternative world
Yesterday the ECB produced a new blog on inflation expectations. A case of bad timing but I doubt anyone outside of the ECB twin towers will recognise this description of the cost of living crisis.
The robustness of medium-term anchoring was crucial. When the ECB began raising its key policy rates in July 2022, these stable expectations helped to contain longer-run inflation pressures. The stability of inflation expectations made the disinflationary adjustment quicker and less costly.
ECB President Lagarde
Last week the ECB President also ignored what was the biggest central banking failure of the modern era.
The main message I want to convey is that our response will be rooted in our monetary policy strategy, which is well equipped to help us navigate it.
In fact it got worse.
Central banks have a long history of dealing with inflationary energy shocks, and over that time we have built up a substantial body of evidence about when they risk spilling over into generalised inflation.
Comment
The ECB finds itself first in line of central banks seeing an acceleration in consumer inflation. Plus the inflation expectations it has emphasised in the past have risen sharply. In one move we have seen approximately half the change we saw in the cost of living crisis.
The problem with a wait and see approach is that anything you do takes 18 months to fully operate so you have to act early. These people though always want to dither and delay.so that their moves usually operate at the wrong time and often make things worse. Markets are presently very volatile but if we look at a German two-year yield of 2.57% it is suggesting that 2 interest-rate increases of 0.25% are on their way.
Plus if we switch to energy we see another area of failure which has been highlighted by this from the Financial Times earlier.
German economy minister urges nuclear power rethink as energy prices soar.