Inflation in the euro zone hits the brakes, but less than expected

Inflation in the euro zone slowed slightly in January, thanks to trends in the food sector, although the fall was more modest than the market expected.

According to the European statistics agency Eurostat, inflation in the euro zone registered 2.8% in January, a tenth below the December figure.

However, analysts consulted by Bloomberg and FactSet projected inflation of 2.7% for January.

Inflation remains above the target set by the European Central Bank (ECB), of approximately 2%.

The value is, however, well below the maximum limit of 10.6% that it reached in October 2022, months after the start of the Russian invasion of Ukraine, which had an especially virulent impact on energy prices.

For Peter Vanden Houte, economist at ING bank, “it is too early to claim victory in the battle against inflation”.

This inflation trend could lead the ECB to gradually abandon the high interest rates applied for much of 2023.

The pace of change in ECB policy, however, is still subject to analysis.

For Vanden Houte, the ECB pays mainly attention to the so-called “core inflation” or underlying inflation, which eliminates volatility in the energy and food segments.

According to Eurostat, underlying inflation in January slowed to 3.3%, compared to 3.4% in December, although analysts projected a level of 3.2%.

– Tensions and risks –

“An increase in transport prices, following geopolitical tensions in the Middle East, remains a risk for inflation,” said Vanden Houte.

According to Eurostat, the increase in food prices (measured together with tobacco and alcoholic beverages) reached 5.7% in January, compared to 6.1% in December.

Among the main economies of the euro zone, Eurostat recorded inflation of 3.1% in Germany and 3.4% in France.

Inflation measured by Eurostat for Spain in January was 3.5%, while Italy recorded 0.9%.

On the same day, Eurostat announced that the unemployment rate in the euro zone in December was 6.4%, the lowest in the entire historical series, which began in April 1998.

Unemployment has fallen sharply in Europe since mid-2021, thanks to the strong economic recovery following the coronavirus pandemic.

Eurostat announced this week that the eurozone narrowly avoided a technical recession in 2023 and is still basically unable to break out of the doldrums.

According to the agency, the euro zone economy recorded zero growth in the fourth quarter of 2023, after a drop of -0.1% in the third quarter of the year.

It thus achieved a timid growth of 0.5% in 2023, slightly below the 0.6% that the European Commission had projected.

Economist Jack Allen-Reynolds, from the consultancy firm Capital Economics, highlighted this week that the euro zone economy will remain stagnant “in the first half of this year”.

“The big picture is that eurozone GDP has remained stable since the third quarter of 2022, when gas prices spiked and the ECB started raising interest rates,” he said.

Analysts believe that the ECB could start cutting rates around April or, according to Vanden Houte, in June.