Inflation in the Eurozone has declined in the last two months of 2022, but the economic indicator is still well above the European Central Bank’s 2% mandate.
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Inflation in the euro zone fell for a third consecutive month in January due to a significant drop in energy costs.
Headline inflation in the euro zone stood at 8.5% in January, according to preliminary data released on Wednesday. In December, the rate was recorded at 9.2%.
Energy remained the main cost driver in January, but once again weakened from previous levels. Energy charges fell to around 17.2% in January from 25.5% in December. However, the cost of food increased slightly, from 13.8% in December to 14.1% in January.
The 20-member region saw substantial price increases in 2022, after Russia’s invasion of Ukraine drove up energy and food costs across the bloc. However, the latest data provides further evidence that inflation has started to subside.
Core inflation, which excludes energy and food costs, stood at 5.2% in December, in line with the previous month.
“The key point is that core inflation was unchanged at a record 5.2%, so the ECB will remain very hawkish,” Jack Allen-Reynolds, senior economist for the ECB, said by email. Europe at Capital Economics.
The performance of the main European index over the last 12 months.
“The apparent decline in headline Eurozone inflation in January, from 9.2% in December to 8.5%, was a big surprise. But we wouldn’t be shocked if it were revised upwards significantly. significant when the final euro area data is released.rd February,” he added, citing delays in receiving official data from Germany.
What this means
The economic indicator is being watched closely ahead of a new interest rate decision due to be released by the European Central Bank on Thursday. Rising inflation has led the ECB to hike rates four times in 2022, and market expectations point to at least two more hikes in upcoming meetings.
“The bottom line is that the larger than expected fall in headline inflation will not deter the ECB from raising interest rates by 50 basis points tomorrow,” Allen-Reynolds said.
In a note to clients last week, Morgan Stanley said that “a 50 basis point hike in February appears to be a done deal, with the Board’s discussion expected to focus on the magnitude of rate hikes in March and -of the”.
Market participants will be looking for clues on the central bank’s next steps. The key ECB rate is currently at 2%, but market expectations suggest an increase to 3.5% by the end of the first six months of the year, according to Reuters.
“Investors will wonder if Christine Lagarde will double previous signals for another 0.5% rise in March and what words she will use to describe any additional future tightening,” said Tom Hopkins, portfolio manager at BRI Wealth Management, per E-mail. .
Unemployment in the eurozone appeared stable at 6.6% in December. This is in line with the previous two monthly readings and also reduces fears of a significant Eurozone recession.
Data released on Tuesday showed better-than-expected growth activity in the eurozone at the end of 2022 – despite economic contractions in Germany and Italy, the eurozone grew by 0.1% in the fourth quarter of the year last.