Inflation and Economic Sentiment in the Euro Area

Inflation in the Euro Area continues to climb. The flash estimate for March was released today and reached 3.5%, up from 3.3% in February and the highest level since the creation of the Euro Area in January, 1999. Not surprisingly, business sentiment has been eroding as a result, not only of rising inflation but also the turmoil in financial markets. The Economic Sentiment Indicator for the entire area, also released today, fell to 99.6 in March, the first time it has been below its long term average of 100 since November, 2005. The first chart show inflation and confidence in the Euro Area.

While sentiment for the entire area has declined, there has been considerable variation in the way sentiment has changed among the big four large countries--Germany, France, Italy and Spain. In Germany, confidence actually rose slightly--0.3%--to 104.0 in March. In France, it was unchanged at 105.6. In Italy, however, it was down 1.3% and in Spain, 4.1%, taking their respective levels to 93.7 and 83.9, well below their long term averages of 100. In year over year comparisons, sentiment in Germany was down 4.9% compared with only 2.8% for France. The big losses in sentiment were in Italy and Spain where the level of sentiment was 16% and 17%, respectively, below the year ago levels. Economic Sentiment Indicators for Germany, France, Italy and Spain are shown in the second chart.