Euro zone inflation unexpectedly rose to 2.5% in January, according to flash data from the European statistics agency, Eurostat, CNBC reports.
This increase, higher than the 2.4% forecast from economists in a Reuters poll, was primarily driven by a sharp jump in energy prices.
Energy costs saw a significant uptick in January, rising by 1.8% compared to the previous year. This marked a notable acceleration from December, when the increase was just 0.1%. In contrast, core inflation, which excludes volatile food, energy, alcohol, and tobacco prices, remained unchanged from December at 2.7%. Services inflation also saw a slight decrease, edging down to 3.9% from 4% in December.
Despite the higher-than-expected headline inflation, analysts are noting that core inflation figures remain relatively steady, and the dip in services inflation was smaller than anticipated. Jack Allen-Reynolds, deputy chief euro zone economist at Capital Economics, pointed out that services inflation has hovered around 4% for over a year, making it difficult to predict when it might ease.
Headline inflation in the euro zone had previously reached a low of 1.7% in September but has since re-accelerated as the effects of lower energy prices from the previous year faded. The European Central Bank (ECB) has maintained that inflation is on track to return to its 2% medium-term target, with most measures of underlying inflation suggesting this goal will be achieved by the summer.
In response to ongoing inflation concerns, the ECB recently cut interest rates by 25 basis points, bringing the key deposit facility rate to 2.75%. Additional rate reductions are expected in the coming months, with analysts predicting a gradual approach to loosening policy.
Capital Economics’ Allen-Reynolds believes that the latest inflation data will not significantly alter the ECB’s near-term policy trajectory, as the bank is expected to prioritize maintaining a careful pace of rate cuts. However, Bert Colijn, Netherlands chief economist at ING, expressed more caution regarding the potential inflationary impact of retaliatory tariffs on EU goods. Colijn warned that such tariffs could add to inflationary pressures and that inflationary risks have not fully subsided.
The euro zone’s latest inflation data follows consumer price index reports from key economies such as France and Germany, which saw inflation rates of 1.8% and 2.8%, respectively.
