The euro zone experienced an unexpected increase in inflation to 2.5% in January, driven primarily by a sharp rise in energy costs. This exceeded economists' expectations and raises concerns about the persistence of inflationary pressures.
The euro zone saw an unexpected surge in inflation to 2.5% in January, according to flash data released by Eurostat, the statistics agency. Economists surveyed by Reuters had predicted a 2.4% increase, unchanged from the previous month. This rise was primarily driven by a sharp acceleration in energy costs, which jumped 1.8% year-on-year compared to a meager 0.1% increase in December. Core inflation, which excludes volatile food, energy, alcohol, and tobacco prices, remained steady at 2.
7% in January, mirroring its level since September. Meanwhile, services inflation, a closely watched indicator, edged down to 3.9% from 4% in December. Jack Allen-Reynolds, deputy chief euro zone economist at Capital Economics, highlighted that both energy prices and core inflation exceeded expectations, while the decline in services inflation was smaller than anticipated. He noted that services inflation has been hovering around 4% for over a year, making it difficult to predict when it might alleviate. The European Central Bank (ECB) acknowledged the persistent inflation trend, stating that it is expected to return to its 2% medium-term target later this year. Most underlying inflation measures suggest that inflation will stabilize around the target in the long run. The ECB recently lowered interest rates by 25 basis points, bringing the key deposit facility rate to 2.75%. Further rate reductions are anticipated throughout the year. Allen-Reynolds believes that the latest inflation data will not sway ECB policymakers from their projected near-term interest rate path. The continued high services inflation, he suggests, will prompt the ECB to implement policy adjustments gradually.Inflation is projected to reach close to the 2% ECB target by summer and might even dip lower towards the year's end, according to Allen-Reynolds' estimates. He also anticipates the impact of potential tariffs on goods imported to the US from the EU, along with possible retaliatory duties from the European Commission, to be minimal. Bert Colijn, Netherlands chief economist at ING, expressed a more cautious outlook on the impact of such tariffs. Colijn warned that retaliatory tariffs could reignite inflation as tariffs typically lead to higher consumer prices, indicating that inflationary risks remain significant. He emphasized that with persistent inflationary risks and escalating uncertainty, the key question is how far the ECB can reduce rates to provide the economy with more breathing room
Inflation Euro Zone Energy Prices European Central Bank Interest Rates Economic Growth
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