Jamie Spencer
Eurozone inflation surged to 2.5% in January, marking its highest rate since July and remaining above the European Central Bank’s (ECB) medium-term target of 2% for the third consecutive month. Eurostat’s final reading confirmed a year-on-year rise in consumer prices, exceeding analysts’ expectations and up from 2.4% in December.
Inflation Trends Across EU Member States
Among the 27 EU member states, inflation trends varied. Compared to December, eight countries saw a drop in annual inflation, five remained stable, and 14 experienced a rise. Hungary recorded the highest inflation rate at 5.7%, while Denmark posted the lowest at 1.4%.
The main drivers of inflation in the euro area were services, contributing 1.77 percentage points, followed by food, alcohol, and tobacco (0.45 p.p.), energy (0.18 p.p.), and non-energy industrial goods (0.12 p.p.). Core inflation, which excludes volatile items, remained unchanged at 2.7% for the fifth consecutive month. Inflation in the broader European Union stood at 2.8% in January.
Impact on ECB Policy and Interest Rates
Despite the rise in inflation, analysts do not expect this data to alter ECB policymakers’ plans to continue lowering interest rates. “January’s inflation data won’t change ECB policymakers’ minds about the likely near-term path for interest rates,” said Jack Allen-Reynolds, economist at Capital Economics.
The ECB lowered borrowing costs by a quarter point for the fifth time in January to 2.75%, amid confidence that inflation will decline to the target 2% during 2025. “The disinflation process is well on track,” ECB President Christine Lagarde said, signaling that further rate cuts are likely.
“We know the direction of travel,” Lagarde added, emphasizing that the speed, timing, and magnitude of future rate moves would be determined meeting by meeting.
