A key inflation report released ahead of Thursday’s European Central Bank (ECB) rate decision showed a let-up in pricing pressure in the euro area, which comprises 21 countries that share the euro as their common currency.
Inflation On The Wane? Euro area annual inflation came in at 1.7% in January, easing from the 2% rate in December, according to a flash estimate published by Eurostat. The reading, however, aligned with the consensus estimate.
The slowdown was due to a 4.1% drop in energy prices, while food, alcohol, and tobacco inflation accelerated to 2.7% from 2.5% in December. The services inflation, while remaining elevated, decelerated slightly to 3.2% from 3.4%.
The annual rate of core inflation, which excludes energy and food prices, slowed to 2.2% from 2.3% in December and dropped to the lowest pace since October 2021. Economists, on average, expected a stable increase for January. Monthly, the euro area’s consumer price index (CPI) fell 0.5%, and core CPI declined a steeper 0.7%.
Separately, Eurostat’s first estimate showed that producer price inflation (PPI) fell 0.3% month-over-month in the euro area in December. PPI for the European Union declined by 0.4%. This marks a reversal from the 0.7% and 0.8% increases, respectively, in November.
The annual rate of PPI was 2.1% for the euro area and 1.9% for the EU.
Activity Data Underwhelms: Service sector activity in the euro area continued to expand in January, albeit by less than expected. S&P Global’s service sector purchasing managers’ index came in at 51.6 compared with December’s 52.4 and the consensus of 51,9. The composite PMI, a measure that combines business activity levels in both manufacturing and services sectors, decelerated to 51.6 from 52.4, while economists expected a reading of 51.9.
Implications for Rates: The ECB targets a 2% annual CPI inflation rate while setting its monetary policy. Commenting on the inflation report, ING economists said the softer inflation environment is in line with their expectations for inflation to average below 2% for 2026. That said, the economists noted that rate cut chatter has intensified recently amid slowing imported inflation, partly driven by a weaker US dollar.
A clear case for rate cuts hasn’t emerged so far, as medium-term inflation expectations have held steady around 2% due to rising business optimism and the expectations that more public investment would boost the economy in the near term, they said.
Implication for Futures Traders: Eurozone inflation is slowing, but not fast enough to prompt aggressive ECB rate cuts, keeping markets on watch for policy signals.”
Following the data, the euro traded flat against the dollar, firmed up against the yen, and weakened slightly against the pound.
The Euro FX Futures (6E), which weakened after the domestic data, reversed course after the U.S. private payrolls data came in weaker than expected.
