Germany’s Inflation Eases While Italy’s Rises: What It Means for the Eurozone

Inflation data for March 2025 reveals diverging economic trends across Europe, with Germany seeing its inflation rate drop to a four-month low while Italy’s inflation unexpectedly surged to its highest level in over a year. These contrasting figures suggest uneven progress in disinflation across the eurozone, complicating the European Central Bank’s (ECB) policy decisions.

Germany’s Inflation Slows to Four-Month Low

Germany’s consumer price inflation slowed to 2.2% year-on-year in March, according to a preliminary estimate from the Federal Statistical Office. This marks the lowest inflation rate since November 2024 and aligns with analysts' expectations.

The slowdown was driven primarily by a decline in services inflation, which eased to 3.4% from 3.8% in February. Additionally, energy prices fell 2.8%, accelerating from a 1.6% drop the previous month. However, food inflation inched higher to 2.9%, up from 2.4% in February, reflecting continued pressures on grocery prices.

Core inflation—which excludes volatile items like energy and food—also cooled to 2.5%, its lowest level since June 2021.

On a monthly basis, consumer prices rose 0.3%, a slight decline from the 0.4% increase seen in February.

Germany’s Harmonised Index off Consumer Prices (HICP), which allows for direct comparison within the eurozone, fell to 2.3% from 2.6%, just below the expected 2.4%—marking the lowest HICP rate since September 2024.

Italy’s Inflation Surges to 16-Month High

Unlike Germany, Italy’s inflation unexpectedly accelerated in March, reaching 2.0% year-on-year, up from 1.6% in February, according to Istat, Italy’s national statistics office. This marks Italy’s highest annual inflation rate since November 2023 and surpasses analysts’ forecasts.

The increase was fuelled by:

• Higher energy and food costs
• Rising tobacco prices (+4.6%)
• Upward pressure from recreational services
• End of winter sales on clothing and footwear

Notably, non-regulated energy prices rose 1.3%, rebounding from a 1.9% decline in February. Unprocessed food inflation accelerated to 3.3%, adding further strain on household budgets.

Meanwhile, core inflation remained steady at 1.7%, showing that price pressures persist beyond volatile energy and food components.

What This Means for the Eurozone

These diverging inflation trends highlight the challenges facing the European Central Bank (ECB) as it prepares for its next policy decision.

Goldman Sachs economist Katya Vashkinskaya noted that her team slightly lowered its euro area core inflation forecast for March to 2.39% year-on-year, but raised its headline inflation projection to 2.15% due to unexpected price pressures from Germany and Italy.

Euro area inflation expectations:

• Headline inflation is expected to slow to 2.2% in March, down from 2.3% in February
• Core inflation is forecasted to ease to 2.5%, from 2.6% previously

With inflation varying significantly across member states, the ECB may struggle to adopt a uniform approach. Germany’s cooling inflation supports expectations for rate cuts, but Italy’s inflation rebound may complicate such decisions.

Market Reaction: European Stocks Slide on Tariff Concerns

Financial markets had a muted reaction to the inflation figures, with the euro holding steady around 1.0810 against the U.S. dollar.

However, European equities continued their downward slide amid concerns over potential U.S. trade tariffs, expected to be announced on April 2 by the Donald Trump administration.

Stock Market Performance

• Italy’s FTSE MIB: -2.4%
• France’s CAC 40: -2.2%
• Spain’s IBEX 35: -1.9%
• Germany’s DAX: -1.5%
• Euro STOXX 50: -2.3%
• STOXX 600: -1.7%

Banks and industrial stocks suffered the most, with notable losses in:

• Société Générale (-4.2%)
• UBS (-4.0%)
• Deutsche Bank (-3.4%)
• Banco Santander (-3.2%)
• UniCredit (-2.9%)

Automakers also saw heavy selling pressure:

• Volkswagen (-4.1%)
• BMW (-3.9%)
• Mercedes-Benz (-3.3%)
• Porsche (-4.3%) (headed for its ninth consecutive loss and 13th decline in the past 14 sessions)

Global Impact: What’s Happening in Asia-Pacific?

In the Asia-Pacific region, the Reserve Bank of Australia (RBA) is set to announce its interest rate decision this week.

• The RBA cut its official cash rate (OCR) by 25 basis points in February, lowering it to 4.1% in response to falling inflation.
• Annual inflation is now at 2.4%, with core inflation easing to 2.7%, bringing both measures within the central bank’s target range.
• However, Australia’s unemployment rate remains lower than the RBA’s neutral level, making another rate cut unlikely at this meeting.

Conclusion

Germany’s falling inflation and Italy’s unexpected surge highlight the eurozone’s uneven disinflation process. While Germany’s slowdown supports expectations of ECB rate cuts, Italy’s rising inflation could delay monetary easing.

Meanwhile, European markets remain under pressure from fears of U.S. tariffs, causing sharp declines in banking and automotive stocks.

With the eurozone inflation data set to be released on April 2, investors will be closely watching for further signals on whether the ECB will begin cutting interest rates in June.