Eurozone inflation slows to 2.6% in February

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Eurozone inflation eased to 2.6 per cent in February, but the figure was higher than expected by economists as the cost of living for consumers continued to rise at persistently strong rates.

The annual increase of consumer prices in the 20 countries that share the euro slowed from 2.8 per cent in January, according to data released by the EU statistics office on Friday. The rate was slightly higher than the 2.5 per cent rate forecast by economists in a Reuters poll.

The continued slowdown in the cost of living for European consumers will be welcomed by the European Central Bank, which meets next week to discuss how soon to cut interest rates amid signs the economy remains mired in stagnation.  

However, many rate-setters are likely to worry that rapid wage growth is still pushing up prices in the labour-intensive services sector, where inflation slowed only slightly to 3.9 per cent in the year to February, from 4 per cent a month earlier.

“The ECB is concerned about persistence in domestically generated inflation,” said Tomasz Wieladek, an economist at investor T Rowe Price, adding that services inflation was “clearly too strong”.

Core inflation, which strips out energy and food prices to give a better picture of underlying price pressures, fell more slowly than economists expected, from 3.3 per cent in the year to January to 3.1 per cent in February.

Fresh food prices in the euro area rose 2.2 per cent in February, the slowest rate since 2021, while industrial goods prices increased 1.6 per cent, almost a three-year low. But energy inflation picked up slightly.

Since the disruption of the coronavirus pandemic and Russia’s invasion of Ukraine triggered the biggest price surge for a generation, eurozone inflation has fallen rapidly from its peak of 10.6 per cent in October 2022. This has raised hopes that the ECB could soon start to lower borrowing costs after it raised its benchmark rate to a record 4 per cent last year.

Senior ECB policymakers have played down the likelihood of imminent rate cuts. Some have signalled they are unlikely to loosen monetary policy before June to give them time to check if wage pressures are moderating enough to allow inflation to reach their 2 per cent target.

Underlining the strength of Europe’s labour market, eurozone unemployment returned to a record low of 6.4 per cent in January after the December figure was revised upward slightly to 6.5 per cent, with the number of jobless people falling by 34,000.

Paul Hollingsworth, an economist at French bank BNP Paribas, said the eurozone’s stickier than expected services inflation “strengthens the resolve of those pushing to wait until June before beginning the cutting cycle” but he did not think the ECB was likely to wait until September.

The ECB plans to release new forecasts after its meeting next week. Goldman Sachs expects it to cut its forecast for eurozone inflation this year from 2.7 per cent to 2.3 per cent and for next year from 2.1 per cent to 2 per cent.