(Bloomberg) -- German inflation eased for a third month in March, supporting expectations that the European Central Bank will start lowering interest rates in June. 

Consumer prices rose an annual 2.3% last month, according to the statistics office — down from 2.7% in February and less than the 2.4% median estimate in a Bloomberg poll of economists. Food costs were a key driver of the slowdown.

The data come after France also reported a slowdown on Friday. At the same time, price gains accelerated in Italy and Spain — in line with warnings from policymakers that the path down to the 2% target won’t be smooth.  

As governments across the region withdraw aid measures introduced when energy costs soared, inflation is being jolted by one-off effects. That’s also the case in Germany, where tax changes and a cheap transport ticket introduced in 2023 will exert upward pressure, according to Deutsche Bank economist Sebastian Becker. 

But the overall picture is still that of a broad weakening, allowing the ECB to prepare investors for a first reduction in borrowing costs in June. Euro-zone data, due Wednesday, are expected to show a dip to 2.5%. A Bloomberg Economics nowcast updated after the German figures suggests a slightly lower reading of 2.4%.

What Bloomberg Economics Says...

“German headline inflation coming closer to the 2% mark, together with a likely easing of the core measure, is welcome news for the European Central Bank. Tax changes and base effects might give inflation some upward push in the coming months, resulting in temporary higher readings again. However, we expect the general disinflation trend continuing and the headline reading even dropping below 2% in 2H24.”

— Martin Ademmer, economist. Read more here

In Germany, fewer companies are planning to raise their prices, particularly in consumer-related industries, the Ifo institute said on Tuesday. An index of such expectations fell to the lowest level in three years in March. 

A lingering concern is labor-market resilience and the resulting large gains in wages that could keep underlying inflation elevated for longer. Confirmation of a moderation in pay increases will only arrive slowly, prompting most officials to exclude a rate cut at next week’s policy meeting. 

ECB Executive Board member Piero Cipollone warned last week against putting too much emphasis on salaries, saying the euro zone’s fragile economy needs workers’ pay to catch up with prices in order to sustain the kind of recovery that’s hoped will gradually take hold.

What happens after monetary easing begins is unclear. Several officials have stressed the need to remain data-dependent and judge developments on a meeting-by-meeting basis, even as others appear to back more rapid loosening.

--With assistance from Joel Rinneby, Kristian Siedenburg and Bhargavi Sakthivel (Economist).

(Updates with Bloomberg Economics starting in fifth paragraph)

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