Eurozone inflation eases as ECB debate over rates heats up

EUROZONE inflation slowed more than expected, suggesting a more heated debate to come at the European Central Bank over how much more interest rates must still rise.

January’s reading came in at 8.5 per cent, Eurostat said on Wednesday (Feb 1), less than economist estimates for a slowdown to 8.9 per cent.

The third monthly retreat was driven by energy. But a gauge of underlying inflation that excludes volatile items like that held at an all-time high of 5.2 per cent.

The data may embolden more dovish officials at the ECB who are starting to push for an easing in the pace of rate hikes following a widely anticipated half-point move on Thursday.

They can point to plunging natural gas prices amid a mild winter, as well as expectations of a similar downshift by the Federal Reserve and a pause in the Bank of Canada’s monetary-tightening cycle.

But their more hawkish colleagues fret about rising wages and have focused on sticky core inflation. President Christine Lagarde warned in December that there’s “good reason to believe” inflation numbers in the first two months of 2023 could be higher.

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A rosier economic backdrop could strengthen price pressures. Data this week suggested the euro region economy will dodge a recession, while the manufacturing industry is recovering and unemployment held at a record-low in December.

Uncertainty over inflation was already elevated due to annual adjustments in how changes are calculated, as well as shifts in how some governments shield households and firms from the ramp-up in energy costs that followed Russia’s invasion of Ukraine.

The picture became even more cloudy when statisticians in Germany said technical problems meant they couldn’t provide January figures as scheduled this week. Eurostat has, instead, made its own estimate for Europe’s biggest economy.

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The aggregate data suggest Eurostat has included a sharp German slowdown, while analysts – surveyed before the postponement was announced – predicted an uptick. Germany will report its figure sometime next week. Eurostat’s final inflation reading is due Feb 23.

The results of what’s already the most aggressive bout of tightening in ECB history are unlikely to become fully visible until the second half of the year. Attention this week will be firmly on Lagarde, and what she sees happening at March’s meeting and beyond.

The ECB will probably deliver 50 basis-point rate increases in February and March, followed by a final 25 basis-point hike in May, according to a Bloomberg poll of economists that sees the deposit rate then settling at 3.25 per cent, up from 2 per cent now.

Officials “will stay the course to ensure the timely return of inflation to our target” of 2 per cent, Lagarde told the World Economic Forum in Davos last month. BLOOMBERG