The euro zone inflation accelerated to 2.5% in January on an annual basis, exceeding expectations due to a rise in energy costs, according to flash data from Eurostat released on Monday. Economists surveyed by Reuters had predicted a 2.4% inflation rate for January, the same as December.
Core inflation, excluding food, energy, alcohol, and tobacco prices, stood at 2.7% in January, maintaining the same level since September. Meanwhile, services inflation, a closely monitored indicator, slightly decreased to 3.9% in January from 4% in December.
Energy costs surged by 1.8% compared to the previous year, a significant increase from December’s 0.1% rise. Both energy prices and core inflation exceeded expectations, while the decline in services inflation was less than anticipated, as noted by Jack Allen-Reynolds, deputy chief euro zone economist at Capital Economics.
The euro zone’s headline inflation had dropped to 1.7% in September but has since picked up due to diminishing base effects from lower energy prices. The European Central Bank confirmed that disinflation is progressing as expected and stated that inflation is projected to return to the Governing Council’s 2% medium-term target this year.
Following a 25 basis points interest rate cut by the ECB last week, bringing the key deposit facility rate to 2.75%, further rate reductions are anticipated throughout the year. Allen-Reynolds mentioned that the recent inflation data is unlikely to alter the ECB’s short-term interest rate trajectory, emphasizing that policymakers may opt for gradual policy adjustments due to the persistent high services inflation.
Inflation is forecasted to approach the ECB’s 2% target by summer and potentially decrease later in the year. The impact of potential tariffs on U.S. imports from the EU, coupled with retaliatory duties, is expected to have a minimal effect, according to Allen-Reynolds.
Bert Colijn, Netherlands chief economist at ING, expressed concerns about the inflationary impact of tariffs, stating that retaliatory tariffs typically lead to higher consumer prices, indicating that inflation risks remain significant.
Recent data from key euro zone economies, such as France and Germany, revealed annual consumer price index rates of 1.8% and 2.8%, respectively. The figures are standardized across the euro zone for comparability.
