German Inflation Sinks in March, Teeing Up ECB Rate CutUpdate

By Ed Frankl

German inflation declined notably in March, laying the groundwork for a rate cut from the European Central Bank in April, despite fears that U.S. tariffs and extra defense spending could lead to an inflationary rebound.

Consumer prices were 2.3% higher in March than the same month of 2024, down from 2.6% in February, German statistics agency Destatis said Monday, using European Union-harmonized figures.

That was a little cooler than expectations of 2.4% from economists polled by The Wall Street Journal.

Investors typically anticipate the ECB to cut its key interest rate on April 17 as the rate of inflation in the eurozone--data for which is due Tuesday--heads toward the ECB's 2% target. But policymakers have in recent days been paring back those expectations as they weigh the potential inflationary effect of tariffs and future German defense spending.

ECB President Christine Lagarde told French radio France Inter on Monday that the battle against inflation is still being fought.

"We're almost where we want to be, but we have to stay there," she said.

The ECB estimates that 25% tariffs on goods imports into the U.S. could raise inflation by 0.5 percentage points than otherwise would be the case. Increased government spending on defense and upgrading infrastructure in Germany could also lift inflation.

However, despite much of the decline in March inflation being driven by falling energy prices, underlying inflation continues to trend down too. Core inflation--which excludes more volatile food and energy prices--declined to 2.5% from 2.7% in February, based on non-harmonized national data. Services inflation fell to 3.4% from 3.8%.

Fears over the health of the eurozone economy could also help ECB decision makers to decide to cut rates. The central bank expects eurozone economic growth of just 0.2% in the first quarter of 2025, and expects U.S. tariffs to slice 0.3 percentage points off eurozone GDP growth in the first year, or more should the European Union retaliate.

Indeed, despite potential fears of longer-term inflationary risks, accelerating short-term disinflationary trends could motivate the ECB to bring rates lower, ING economist Carsten Brzeski said in a note to clients.

Write to Ed Frankl at edward.frankl@wsj.com