Eurozone inflation has eased in the last two months of 2022, but the economic indicator is still well above the European Central Bank’s 2% mandate.
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Eurozone inflation fell for the third straight month in January, driven by a sharp fall in energy costs.
Headline inflation in the euro zone was 8.5% in January, according to preliminary data released on Wednesday. In December the rate was 9.2%.
Energy remained the biggest cost driver in January, but weakened again compared to the previous year. Energy costs fell from 25.5% in December to an estimated 17.2% in January. However, food costs rose slightly from 13.8% in December to 14.1% in January.
The region of 20 has endured significant price hikes in 2022 after Russia’s invasion of Ukraine pushed up energy and food costs across the bloc. However, the latest data provide further evidence that inflation is beginning to ease.
Core inflation, which excludes energy and food costs, was 5.2% in December, unchanged from the previous month.
“The key point is that core inflation was unchanged at a record 5.2%, so the ECB will remain very hawkish,” Jack Allen-Reynolds, senior Europe economist at Capital Economics, said via email.
The performance of Europe’s main index over the last 12 months.
“The apparent fall in euro-zone headline inflation in January to 8.5% from 9.2% in December came as a major surprise. But we wouldn’t be shocked if it were revised significantly upwards when the final euro-zone data was released on February 23,” he added, citing delays in receiving official data from Germany.
What it means
The economic indicator will be closely watched ahead of a new rate decision expected from the European Central Bank on Thursday. Higher inflation has prompted the ECB to hike rates four times in 2022, and market expectations point to at least two more hikes in the coming meetings.
“The upshot is that the stronger-than-expected fall in headline inflation won’t stop the ECB from raising interest rates by 50 basis points tomorrow,” Allen-Reynolds said.
In a note to clients last week, Morgan Stanley said that “a 50 basis point hike in February appears like a done deal, with discussion in the Council set to focus on the magnitude of rate hikes in March and beyond.”
Market participants will be looking for clues on the central bank’s next moves. The key ECB interest rate is currently 2%, but market expectations point to an increase to 3.5% by the end of the first six months of the year, according to Portal.
“Investors will be interested to see if Christine Lagarde doubles down on earlier signals for a further half-percent hike in March and what words she uses to describe additional tightening ahead,” said Tom Hopkins, portfolio manager at BRI Wealth Management, via email on Wednesday .
Eurozone unemployment appeared stable at 6.6% in December. This corresponds to the two previous monthly values and also reduces the fear of a significant recession in the euro zone.
Data released on Tuesday showed better-than-expected euro-zone growth activity in late 2022 – despite economic contractions in Germany and Italy, the euro-zone grew 0.1% in the fourth quarter of last year.
