Markets rallied late last week as eurozone inflation came in below expectations (more info below). However, there are a couple of intricate details which could do with some further scrutiny. Firstly, base effects play an important role here. This is the impact of the year-on-year nature of the figures and how it plays out. We saw a huge spike in energy prices in the first quarter of 2022. All the major components of this sector (Brent, WTI, Gas, Coal) have all seen at least double digit falls over the last 12 months. This has a big influence in the overall on the inflation calculation. Simply put, the price of oil and gas couldn’t continue to rise at the same rate.


A second important point to note is the difference of headline and core inflation. Core inflation is still proving to be stubborn. Given this reading strips out more volatile inflation inputs (such as oil, which has even seen a large increase this morning due to OPEC+ supply cuts) and is in fact still rising within the eurozone. Whilst interest rate expectations have been influenced by recent banking sector developments, the core inflation figure suggests that the ECB will continue to raise rates throughout Q2 of this year. However, given this is in line with market expectations, markets looks set to take the moves in their stride.


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