Euro zone inflation eases as expected, but core figures disappoint

Euro zone headline inflation eased slightly in January, flash figures published by the European Union’s statistics agency showed Thursday, while core figures declined less than expected.

Annual headline price rises came in at 2.8%, in line with a forecast of economists polled by Reuters. Inflation stood at 2.9% in December, up from 2.4% in November, largely due to the wind-down of energy price support measures.

Core inflation dipped to 3.3% in January from 3.4% in December. A Reuters forecast indicated a fall to 3.2% for last month.

By sector, services inflation — an important gauge for policymakers due to its link to domestic wage pressures — held steady at 4%. Disinflationary effects from the energy market continued to reduce, from -6.7% to -6.3%.

Economic growth has been stagnating in the bloc.

Preliminary figures out earlier this week showed inflation in Germany easing slightly more than had been forecast, reaching 3.1%. The euro zone’s biggest economy has become one of its main drags on growth, with German gross domestic product contracting by 0.3% in the fourth quarter.

European Central Bank officials are monitoring a host of data to see if and when they can begin bringing interest rates down from their current record highs. Price rises have cooled significantly from a peak of 10.6% in October 2022, with the central bank’s 2% target coming into sight.

While markets continue to price in cuts starting in April, some policymakers have pushed back with suggestions that declines are likelier to take place in the summer or even later. The ECB stresses it remains data dependent.

At last week’s monetary policy meeting, when interest rates were left unchanged, ECB President Christine Lagarde said that the “disinflation process is at work” despite the December uptick.

Kamil Kovar, senior economist at Moody’s Analytics, said the figures presented a “mixed bag.”

“The decline to 2.8% was welcome news, especially relative to ECB projections that were for an increase in the inflation rate. But it was driven by a downside surprise in energy, which is all the more shocking given the end of government interventions,” Kovar said in emailed comments.

“However, core inflation only inched lower, with services especially coming in quite hot. While some of this hot reading is explained by regular annual re-pricing and a change in weights, it nevertheless makes a March rate cut a pipe dream, and raises [the] bar for a cut in April. A cut in June remains our baseline forecast.”