Jamie Spencer
Euro zone inflation slowed to 2.4% in February, according to preliminary data from Eurostat released Monday. However, the reading came in slightly above analyst expectations, as economists polled by Reuters had forecast a decline to 2.3% from 2.5% in January.
Core Inflation and Services Prices Decline
Core inflation, which excludes volatile components such as energy, food, alcohol, and tobacco, also eased slightly to 2.6% from 2.7% the previous month. Meanwhile, services inflation, a key indicator closely watched by the European Central Bank (ECB), dipped to 3.7% from 3.9% in January.
The latest figures also pointed to a sharp slowdown in energy price increases, which rose just 0.2% in February, down from 1.9% in January.
Geopolitical Risks Cloud Inflation Outlook
While the decline in services inflation is seen as an encouraging trend, economists warn that geopolitical uncertainties—particularly U.S. tariff threats—could complicate the inflation trajectory.
“February’s decline in services inflation is the start of a trend that will pull the core rate down substantially this year,” said Jack Allen-Reynolds, deputy chief euro zone economist at Capital Economics.
However, Bert Colijn, chief Netherlands economist at ING, cautioned that rising trade tensions and potential disruptions in energy markets could lead to inflationary pressures.
“Geopolitical developments are making the inflation outlook highly uncertain at the moment. Think, for example, of uncertainty surrounding a trade war and energy prices,” Colijn said.
Impact of Trump’s Tariff Threats
Repeated threats from President Donald Trump to impose 25% tariffs on European goods have raised concerns among investors and economists. The potential impact on inflation and economic growth remains unclear, as tariffs often increase consumer prices and could weigh on key European economies such as Germany, the EU’s largest economy.
ECB’s Next Move
Despite the recent inflation fluctuations, ECB policymakers remain optimistic about reaching the central bank’s 2% target. The ECB meets later this week and is widely expected to announce its sixth interest rate cut since it began easing policy in June.
Markets will closely monitor the ECB’s statement for insights on inflation and monetary policy strategy. Colijn noted that while the latest data supports the view that inflation remains “fairly benign”, it does not provide a strong basis for determining how low interest rates should go.
“The big question is how low it will go,” Colijn said. “We expect another 0.25 percentage point rate cut later this week, but the debate on when the ECB will reach its terminal rate will intensify.”
Mixed Inflation Readings Across Euro Zone
Ahead of the euro zone-wide report, several major economies published their inflation figures last week:
- Germany: Inflation remained unchanged at a higher-than-expected 2.8%.
- France: Inflation eased sharply to 0.9%.
These readings are harmonized across the euro zone to ensure comparability. Analysts will now watch how the ECB responds to inflation trends as the euro zone economy navigates ongoing geopolitical and trade uncertainties.
