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Inflation in the euro zone slowed to 2.8% in January, but the decline in the underlying price index was smaller than economists expected after accounting for more volatile energy and food costs.
Headline inflation in the euro zone has fallen again after briefly rising to 2.9% in December, confirming investor expectations that the European Central Bank could cut interest rates as early as this spring. become.
But the unchanged rate of growth in prices for labor-intensive services could prompt a cautious approach from some ECB rate-setters, who want to wait for signs of slowing wage growth before lowering borrowing costs. .
The EU's statistics arm Eurostat said on Thursday that services prices rose by 4% annually in January, the third month in a row.
Core inflation, which excludes more volatile energy and food costs to better capture underlying price pressures, slowed to 3.3% in January from 3.4% in December, economists said. Slightly more than expected. Economists polled by Reuters had expected the core interest rate to be 3.2%.
Jack Allen Reynolds, an economist at consultancy Capital Economics, said: “Both headline and core inflation rates in the euro area have declined modestly, but policymakers are concerned that disinflation in the services sector has stagnated.'' It is likely that they are concerned about this.”
European government bond yields maintained their previous gains on Thursday as investors judged the data to reduce the likelihood of an early interest rate cut by the ECB.
The interest rate-sensitive two-year German federal bond yield rose 0.06 percentage points on the day to 2.47%. The 10-year yield on German federal bonds, the benchmark for the euro zone, rose 0.05 percentage point to 2.21%. Yield is inversely proportional to price.
Western central banks are weighing the risk of reigniting price pressures if they lower borrowing costs too soon, against the risk of unnecessary damage to growth and employment by waiting longer than necessary.
Federal Reserve Chairman Jay Powell on Wednesday pushed back on investor bets that the Fed could cut interest rates as early as March, saying this was not the “base case.” On Thursday, Bank of England Governor Andrew Bailey said he needed “further evidence” of disinflation before cutting interest rates.
ECB President Christine Lagarde said last week that it was “too early to talk about rate cuts” even though inflation is expected to “ease further this year.”
With the euro zone economy stagnant for much of last year, investors are betting the ECB will respond to a sharp decline in price pressures by lowering the benchmark deposit rate from its current record high of 4% as early as April. It shows a point of view.
Annual inflation remains above the ECB's 2% target, but monthly price increases have been trending below that level since last autumn. From December to January, prices in the euro area fell by 0.4%.
Annual inflation rates fell in half of the 20 countries sharing the euro, ranging from 0.7% in Finland to 5% in Estonia.
However, rate setters cited further evidence that labor costs were easing in the first quarter of this year after wage growth reached 5.3% last year. He says he wants to know.
The resilience of Europe's job market despite rising borrowing costs and slowing economic growth showed on Thursday that the euro zone unemployment rate remained at a record low of 6.4% in December. highlighted by data. The number of unemployed people in the region was 10.9 million, down 17,000 from the previous month and 369,000 from a year earlier.
Kamil Kobar, an economist at Moody's Analytics, said the “hot forecast” for services inflation “will dictate the March rate cut.” [by the ECB] It's just a pipe dream, but it raises the bar for a pay cut in April. Our basic forecast for a rate cut in June remains unchanged. ”
Additional reporting from London by George Steer
