Euro zone inflation eases in January, signaling the start of a softer economic phase, according to fresh data released on Wednesday — a development that reinforces expectations that policymakers will stay patient in the months ahead.
Inflation across the 21 nations using the euro edged lower in January, slipping to 1.7%, its weakest level since September 2024. The slowdown was largely driven by falling energy prices and came in exactly as economists had anticipated, suggesting price pressures are continuing to cool without causing alarm.
While headline inflation eased, a closely watched measure of underlying inflation — which excludes volatile components such as energy, food, alcohol, and tobacco — also showed modest improvement. Core inflation dipped to 2.2% from 2.3% in December, reflecting softer price growth in the services sector.
ECB Likely to Stay the Course
Taken together, the figures are unlikely to prompt any immediate action from the European Central Bank, which is widely expected to hold interest rates steady at its upcoming policy meeting and potentially for the rest of the year.
“With underlying inflation still a bit too elevated for comfort, and expectations that the euro zone economy could regain some traction later this year, the most probable scenario is that rates remain unchanged for now,” said Diego Iscaro, head of European economics at S&P Global Market Intelligence.
The ECB itself forecasts inflation will dip slightly below its 2% target this year and next before gradually returning to that level by 2028.
A Delicate Balancing Act Ahead
Inflation has hovered close to the ECB’s target for more than a year, following sharp price increases triggered by the post-pandemic recovery and the energy shock stemming from Russia’s invasion of Ukraine in 2022.
Still, there is no clear consensus on what the ECB’s next move might be. Economists remain divided over whether the central bank will eventually cut rates to support growth or hike them again to fully tame inflation. Some policymakers have recently suggested that either option remains on the table.
Adding another layer to the debate is the euro’s recent strengthening against the dollar. The currency’s rise has been linked in part to market unease over U.S. political uncertainty under Donald Trump and concerns about the independence of the Federal Reserve.
“Inflation running below target and a stronger euro could give the ECB pause about keeping policy unchanged for too long,” said Melissa Davies, an economist at Redburn Atlantic.
For now, though, the message is clear: Euro zone inflation eases in January, signaling the start of a softer economic phase, and the ECB appears content to wait, watch, and let the data guide its next steps.
