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Eurozone inflation slows to 8.5% on back of lower energy costs

Eurozone inflation slowed to its lowest level since May in the year to January, as central bank policymakers prepare to impose another sharp rise in borrowing costs on the region’s businesses, households and governments.

Eurostat’s flash index on Wednesday showed consumer prices rose at an annual rate of 8.5 per cent in January, decelerating from 9.2 per cent in December. However, core inflation, which excludes changes in food and energy prices and is considered a better measure of underlying inflation, remained unchanged at an all-time high of 5.2 per cent.

The headline figure was lower than the 9 per cent forecast by economists polled by Reuters, and well below the record high of 10.6 per cent hit in the year to October.

While the fall in the headline rate will be welcomed by policymakers at the European Central Bank, officials are unlikely to be dissuaded from continuing to raise borrowing costs due to the elevated level of core inflation.

“The ECB will need to see much more evidence of cooling price pressures before it can seriously contemplate slowing the pace of hikes further,” said Paul Hollingsworth, chief economist at BNP Paribas Markets 360, a research branch of the bank.

The ECB is widely anticipated to increase its deposit interest rate to 50 basis points to 2.5 per cent. The rate has risen from minus 0.5 per cent in June as officials seek to combat inflation.

Headline inflation is slowing in most advanced countries, including the US and the UK, reflecting the easing of global energy costs. However, measures of underlying inflation remain a concern for policymakers. The US Federal Reserve is set to raise interest rates by 25bp later on today, while the Bank of England is likely to increase its benchmark rate by 50bp.

The decline was driven by energy inflation which slowed to 17.2 per cent in January from 25.5 per cent in the previous month and more than halved from a peak of 41.5 per cent in October.

However, food inflation accelerated to 14 per cent in January, up from 13.8 per cent in the previous month and marking a new record high since records began in 1997.

Services inflation, a bellwether of domestic price pressures, marginally declined to 4.2 per cent in January from 4.4 per cent in the previous month.

John Leiper, chief investment officer at Titan Asset Management, said price pressures, particularly in the services sector, “will remain elevated for some time”.

January’s inflation rates varied from 21.6 per cent for Latvia to 5.8 per cent for Spain. Germany has not yet released its figures for January. Some economists think the bounceback in inflation expected for Germany due to one-off energy government measures in December might not be accounted for in the eurozone’s flash estimates.

Separate data also published by Eurostat on Wednesday showed that the eurozone labour market remained resilient. Unemployment across the bloc was unchanged at 6.6 per cent in December, the lowest since records began in 1995.


Source: Economy - ft.com

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