Core inflation recorded a further decline in March, strengthening the belief that price growth in the economy, for the moment, is returning within the target.

According to data from the Bank of Albania, core inflation in March dropped to 2.73%, from 2.91% in February. Core inflation has hit its lowest level since February 2022.

Also, the average core inflation of the first quarter marked a significant drop to 2.85%, from 3.42% that had been in the last quarter of last year. Measured for the quarter, core inflation is at its lowest level since the last quarter of 2021.

Core inflation is calculated by the Bank of Albania for a group of goods that account for 69% of the share in the general basket of the Consumer Price Index. Core inflation excludes those products that usually have high volatility, mainly food and energy products. The purpose of calculating core inflation is to strip the overall increase in prices from fluctuations of a shorter-term nature.

Although the Bank of Albania estimates that internal inflationary pressures remain high, mainly due to the pressure coming from the labor market, core inflation is following a downward trajectory, but remaining at higher levels than the inflation of the full basket of consumer prices.

According to INSTAT, in March inflation dropped to 2.3%, the lowest level in almost three years. However, the main contribution was made by the significant decrease in imported inflation, due to the drop in the prices of goods in the world markets and the effect of the strengthening of the Lek on the foreign exchange rate.

The drop in inflation, which has gone beyond expectations, as stated by Governor Sejko in March, is also changing the monetary policy scenarios. At the March meeting, the Supervisory Council decided to keep the basic interest rate unchanged at 3.25%. If until the end of last year, a further increase in interest rates was expected, at the moment such a scenario seems to be heading towards archiving.

There are even analysts who think that the Bank of Albania can already start thinking about lowering interest rates, taking into consideration the drop in inflation below the target, but also the further appreciating trends of the Lek exchange rate.

However, there are also those analysts who still believe that this year we may have new rounds of inflation growth. In the latest analysis for Albania, Raiffeisen Research predicts hotter inflation during the summer months, mainly due to the ongoing strong tourist season, further wage increases, and higher oil prices on the international market.