Eurozone Inflation Cools to 2.2%, Jobless Rate Falls, Boosting Euro Ahead of ECB Decision

Eurozone Inflation Cools in March, While Labor Market Strengthens

Eurozone inflation slowed slightly in March 2025, reinforcing expectations of monetary policy flexibility later this year. Simultaneously, the region’s labor market showed continued resilience, suggesting a cautiously constructive environment for risk assets and bond markets.

Core Inflation Falls Below Expectations

Eurostat’s flash estimate showed core CPI rose 2.4% year-on-year in March, undercutting both the 2.5% consensus and February’s 2.6% print. Headline CPI matched forecasts at 2.2%, but still marked a modest decline from the previous 2.3%. Services inflation eased to 3.4% from 3.7%, and energy turned deflationary again at -0.7%, down from February’s 0.2%. Non-energy industrial goods inflation remained stable at 0.6%, while food, alcohol, and tobacco rose to 2.9%, providing some upward pressure.

The deceleration in services—historically sticky and wage-sensitive—will be particularly relevant for the ECB’s rate path. With core inflation now clearly trending lower, the likelihood of a mid-year rate cut remains intact, especially as energy continues to act as a drag on headline prices.

Labor Market Conditions Improve

The euro area unemployment rate declined to 6.1% in February from 6.2% in January, beating expectations and reinforcing underlying economic resilience. The number of unemployed dropped by 70,000 to 10.58 million. Youth unemployment ticked slightly higher to 14.2%, but broader employment trends remained firm.

The EU-wide jobless rate also declined to 5.7%. Notable country-level improvements included Italy (5.9%) and Greece (8.6%), while Germany held steady at 3.5%. The labor market’s strength, even as inflation slows, may give the ECB more confidence that disinflation is not materially damaging growth.

Regional Inflation Divergence Persists

At the member state level, divergence continues. Inflation in Spain dropped to 2.2% from 2.9%, while Italy saw a pickup to 2.1% from 1.7%. Germany, the eurozone’s largest economy, printed at 2.3%, down slightly from 2.6%, offering reassurance on regional price trends. France, however, remains an outlier at just 0.9%, highlighting asymmetric pressures across the bloc.

Market Forecast: Bullish EUR Short-Term

With inflation easing and the labor market holding steady, the backdrop favors a bullish near-term outlook for the euro, particularly as ECB rate cut expectations may become more measured. Bond markets may benefit from the inflation miss, but resilient jobs data limit the scope for aggressive policy easing. EUR/USD could find support above 1.08, while eurozone equity indices may also benefit from the soft-landing narrative.

More Information in our Economic Calendar.