Headline inflation is forecast to have risen by 2.1% on April 2024 levels, according to FactSet consensus estimates, and below March’s reading of 2.2% year over year.
Core inflation, which shows prices without volatile components such as energy and food costs, is expected to have risen by 2.5% year on year in April, slightly up from March’s 2.4%.
“European inflation is expected to fall to 2.1% in April, the lowest level we’ve seen in six months, and almost in line with the ECB’s targeted level,” says Michael Field, chief equity market strategist for Europe at Morningstar.
But he added that “the celebrations could be short-lived” due to the ongoing risk of US tariffs.
“The EU is currently formulating a response to Trump’s most recent round of tariffs. Shrewdly, they are waiting until the end of the 90-day pause, but any further escalation would see inflation moving sharply upwards again in Europe.”
Service Inflation Was the Driver in March
In March 2025, service inflation remained the main driver of headline inflation (HICP), with its contribution at 1.56 percentage points. The contribution of food, alcohol and tobacco stood at 0.57 percentage points, and the contribution of energy at -0.10 percentage points. Non-energy goods provided a 0.16 percentage points boost.
It would be a positive for markets to see core inflation steady at 2.5%, says Morningstar’s Field.
“While this number remains above the ECB’s 2% target, its fall over the last year represents good progress for what can often be a sticky measure of inflation,” he adds.
Goldman Sachs increased its headline inflation forecast after Spanish flash HICP inflation came in above expectations at 2.2% year over year on April 29. Spanish inflation was driven by a notable increase in leisure and culture prices, according to the local statistics institute.
They also expect German headline inflation to decline to 2.2% year over year in April, from 2.3% in March, and core inflation to tick up to 3.1% year over year, driven by travel-related services due to the timing of Easter this year. Finally, Italian headline inflation was below expectations at 2.1%, while French data just released surprised on the upside as HICP increased by 0.8% year over year.
Taking the Spanish, Italian and French national data into account, they upgraded euro area headline inflation forecast for April slightly to 2.12% year on year, from 2.09% previously.
Will the ECB Continue its Easing Cycle?
The next European Central Bank’s monetary policy meeting will take place in Frankfurt on June 5, and markets expect that the easing cycle will continue amid economic headwinds. The ECB cut its key interest rate by 25 basis points to 2.25% on April 17, the sixth consecutive reduction in this cycle.
“Lower inflation takes the pressure off the ECB, who can in turn lower interest rates further,” says Morningstar’s Field, adding that lower interest rates will help boost equity markets, which offer attractive upside potential following the tariffs induced crash.
Also Allianz’s Research Team thinks that inflation concerns have moved to the background.
“Services inflation fell, wage growth is coming down and leading indicators from Purchasing Manager Surveys (PMIs) show easing price pressures ahead. Most importantly, due to the aggressive trade war, disinflation forces should gain further traction and push inflation well below the target of 2% soon,” they said in a report on April 18.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
