The underlying situation continued to improve, albeit gradually. Excluding volatile food, alcohol, tobacco and energy prices, inflation slowed to 3.3% from 3.4% in December. This is the lowest level in about two years.
However, prices for services, which are typically prone to wage pressure, did not rise in January and remained flat at 4%. ECB officials have repeatedly warned that strong wage growth could further slow the recovery to the 2% target.
ECB President Christine Lagarde said policymakers wanted to rein in “very important” wage data before cutting interest rates.
At the same time, the euro zone employment data for December showed no signs of a dramatic deterioration that would undermine workers' bargaining power. The seasonally adjusted unemployment rate was 6.4%, stable compared to November 2023 and down from 6.7% in December 2022.
Expectations for the first rate cut in the second quarter will rise as headline inflation is trending downward again. The ECB's main deposit rate has reached a record high of 4%, even though the region's economy has barely grown in the past six quarters.
The ECB has made clear that its next action will be down, but the timing remains uncertain. “The ravenous beast of inflation has been tamed,” Bundesbank President Joachim Nagel said earlier this week, suggesting that opposition to early action may have waned.
