Interpreting Euro Area Inflation Figures: Year-on-Year vs Alternative Measures

The data released on April 19 showed that year-on-year inflation in the euro area dropped from 8.5% in February to 6.9% in March, which seems like a large fall. However, this drop mainly reflects price changes from a year ago, and alternative measures of inflation show that current price pressures remain elevated. The ECB’s main objective is to steer year-on-year inflation in the euro area to 2%, but the decision to stop raising interest rates will depend on incoming economic data. Year-on-year inflation can be a distorted signal since it assigns equal weight to monthly outcomes from further in the past. Alternative measures of inflation give more weight to recent data and can be less volatile. Overall, inflation remains a concern, and restrictive monetary policy should continue.