FRANKFURT — Eurozone inflation eased as expected in January, fueling hopes for an early European Central Bank interest rate cut.
Inflation eased to 2.8 percent from 2.9 percent in December, when it had jumped from 2.4 percent in the previous month, preliminary data from Eurostat, the EU’s statistics agency, showed. Analysts had accurately projected inflation to drop.
Headline inflation is expected to be bumpy throughout the early part of 2024, as various one-off effects such as tax hikes and the withdrawal of energy subsidies affect the annual calculations.
The underlying picture also continued to improve, albeit gradually. Excluding the volatile prices of food, alcohol, tobacco and energy, inflation slowed to 3.3 percent from 3.4 percent in December. That’s the lowest it’s been in nearly two years.
However, services prices, where wage pressures are typically easier to spot, failed to budge in January, staying steady at 4 percent. ECB officials have warned repeatedly that solid wage growth may slow further progress in getting back to its target of 2 percent.
ECB President Christine Lagarde said that policymakers want to see a moderation in “critically important” wage data, before cutting interest rates.
Eurozone employment data for December, released simultaneously, showed no signs of dramatic weakening that could undermine workers’ bargaining powers. The seasonally adjusted unemployment rate was 6.4 percent, stable compared with November 2023 and down from 6.7 percent in December 2022.
The resumed downward trend in headline inflation will keep up bets for a first rate cut in the second quarter. The ECB’s key deposit rate stands at a record 4 percent, even though the region’s economy has hardly grown in the last six quarters.
The ECB has been clear in that its next move will be down, although the timing of that move remains unclear. Bundesbank President Joachim Nagel said earlier this week that “the greedy beast of inflation has been tamed”, signaling that his opposition to an early move may have weakened.