Eurozone inflation cooled to 1.7% in January, falling below the European Central Bank’s (ECB) 2% target, thanks to lower energy costs and a stronger euro.
The annual inflation estimate was in line with economists’ forecast in a Reuters poll and also came in below the 2% figure recorded in December.
Core inflation, which strips out more volatile energy, food, alcohol and tobacco prices, fell 0.1 percentage points to 2.2%, Eurostat revealed on Wednesday, reaching its lowest level since October 2021 — a four-year low. This was down from 2.3% in the year to December, according to the flash estimate.
Looking at the main components of euro area inflation, services is expected to have the highest annual rate in January (3.2%, compared with 3.4% in December), followed by food, alcohol & tobacco (2.7%, compared with 2.5% in December), non-energy industrial goods (0.4%, compared with 0.3% in December) and energy (-4.1%, compared with -1.9% in December).
It comes as the ECB is expected to keep interest rates on hold at 2% for a fifth consecutive time at its meeting on Thursday, which will be its first meeting of the year.
Diego Iscaro, head of European economics at S&P Global Market Intelligence, said: “January’s fall in inflation, combined with the strengthening of the euro at the start of the year, is likely to provide some ammunition to the doves in the governing council. The ECB is expected to keep rates on hold when it meets tomorrow, but calls for a resumption in monetary easing are likely to amplify over the coming months if this trend continues.”
“With underlying inflation still a little too high for comfort and expectations that the eurozone economy will regain momentum later in the year, we believe the most likely outcome is that the ECB will keep rates unchanged for the foreseeable future.”
Economists expect no change in the coming months from the ECB, which has predicted that inflation will average 1.9% in 2026 after hovering at 2.1% last year.
Paul Hollingsworth, head of DM Economics at BNP Paribas Markets 360, said that the threshold for any policy action this year was high.
“We see a high bar for any policy action, and stronger-than-anticipated underlying price pressures suggest the ECB will favour a steady hand for a prolonged period,” he said in emailed comments last week.
“We continue to see the next move as a hike, in the third quarter of 2027, by which point we expect more evidence of stronger domestic price pressures stemming from the impact of higher defence and infrastructure spending,” he said.