Inflation in the euro zone eased in the last two months of 2022, but the economic indicator is still well above the European Central Bank’s 2 percent mandate.
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Inflation in the Eurozone fell for the third month in a row in January due to a sharp drop in energy costs.
Core inflation in the euro zone rose to 8.5 percent in January, according to preliminary data released on Wednesday. In December, this rate was recorded at 9.2 percent.
Energy remained the biggest driver of spending in January, but once again fell from previous levels. Energy costs fell to 17.2 percent in January, down from 25.5 percent in December. However, food spending increased from 13.8 percent in December to 14.1 percent in January.
The 20-member region experienced significant price increases in 2022 after Russia’s invasion of Ukraine raised energy and food costs across the bloc. However, the latest data shows more evidence that inflation is starting to ease.
Core inflation, which strips out energy and food costs, rose to 5.2 percent in December from a month earlier.
“The key point is that core inflation is unchanged at a record 5.2 percent, so the ECB will remain very hawkish,” Jack Allen Reynolds, chief European economist at Capital Economics, said by email.
The apparent drop in euro area headline inflation in January, from 9.2% in December to 8.5%, was a surprise. But we won’t be shocked if it is revised significantly when the final Eurozone data is released. on the 23rdrd February, he added, referring to the delay in receiving official information from Germany.
What does it mean
This economic indicator is closely monitored on the eve of the new interest rate decision that is to be published by the European Central Bank on Thursday. Higher inflation has seen the European Central Bank raise rates four times in 2022, and market expectations point to at least two more hikes in future meetings.
“The bottom line is that a more-than-expected fall in headline inflation will not deter the ECB from raising interest rates by 50 basis points tomorrow,” said Alan Reynolds.
Morgan Stanley said in a note to clients last week that “the 50 basis point hike in February appears to be a done deal, and council discussions are focused on the size of rate hikes in March and beyond.”
Market participants will be looking for clues on the central bank’s next steps. According to Reuters, the European Central Bank’s main rate is currently 2 percent, but market expectations point to a rise to 3.5 percent by the end of the first six months of the year.
“Investors will be looking to see if Christine Lagarde doubles down on previous signals for another half-percent hike in March and what words to describe any further tightening,” Tom Hopkins, portfolio manager at BRI Wealth Management, said by email on Wednesday. It will be used in the future. .
The unemployment rate in the Eurozone was flat at 6.6% in December. This is in line with the previous two monthly readings and also eases fears of a significant economic slowdown in the Eurozone.
Data released on Tuesday showed better-than-expected growth in the euro zone at the end of 2022 – despite economic contractions in Germany and Italy, the euro zone grew by 0.1 percent in the fourth quarter of last year.