A person buys products at a Mercadona store in Lisbon, Portugal, on January 25, 2025.
Luis Boza | Nurphoto | Getty Images
The euro zone inflation accelerated to a hotter-than-expected 2.5% in January on an annual basis as energy costs jumped, flash data from statistics agency Eurostat showed Monday.
Economists polled by Reuters had expected the January inflation print to come in at 2.4%, unchanged from December.
So-called core inflation, which strips out food, energy, alcohol and tobacco prices, came in at 2.7% in January and has remained unchanged since September. The closely watched services inflation print meanwhile inched lower to 3.9% in January from 4% in December.
Energy costs however jumped, rising 1.8% from a year earlier. This was up sharply from December’s 0.1% increase.
Both energy prices and core inflation came in higher than anticipated, while the dip in services inflation was smaller than hoped for, Jack Allen-Reynolds, deputy chief euro zone economist at Capital Economics said in a note on Monday.
“Services inflation has been stuck around 4% for over a year,” he pointed out, noting that it was difficult to predict when it would ease.
Headline inflation in the euro zone hit a low of 1.7% in September, but has since re-accelerated as base effects from lower energy prices have faded. The European Central Bank last week said disinflation “is well on track.”
“Inflation has continued to develop broadly in line with the staff projections and is set to return to the Governing Council’s 2% medium-term target in the course of this year,” the bank added. “Most measures of underlying inflation suggest that inflation will settle at around the target on a sustained basis.”
The ECB on Thursday cut interest rates by 25 basis points, bringing the key deposit facility rate to 2.75%. Further rate reductions are expected from the ECB throughout the year.
Capital Economics’ Allen-Reynolds said that the latest inflation data “won’t change ECB policymakers’ minds about the likely near-term path for interest rates.”
“The fact that services inflation remained high will mean that they will prefer to loosen policy in small steps,” he said.
Inflation is likely to reach close to the 2% ECB target by the summer and could even fall lower later in the year, Allen-Reynolds estimated. He added that the net effect of potential tariffs imposed on goods imported to the U.S. from the EU — along with possible retaliatory duties from the European Commission — will likely be small.
Bert Colijn, Netherlands chief economist at ING expressed more caution about the impact of such tariffs.
“Retaliatory tariffs would add to inflation again as tariffs usually result in higher consumer prices,” he said Monday, adding that this meant inflationary risks “have far from fully abated.”
“With inflationary risks still prevalent and uncertainty increasing, the question is how low the ECB can push rates to give the economy more breathing room,” Colijn said.
The Monday data comes after several key euro zone economies, including France and Germany, last week reported their latest consumer price index data. The annual rate hit 1.8% in France and 2.8% in Germany, according to preliminary data from the country’s statistics agencies. The figures are harmonized across the euro zone for comparability.
