8.5 percent inflation: inflation rate in the euro zone falls significantly

Status: 02/01/2023 12:24 p.m

The inflation rate in the euro area is falling noticeably. In January, consumer prices climbed 8.5 percent year-on-year. The ECB is likely to take the slowing inflation lightly ahead of Thursday’s interest rate decision.

At the beginning of the year, the inflation rate in the euro area fell more sharply than expected. In January, consumer prices climbed by 8.5 percent year-on-year, according to a first estimate from the statistics office Eurostat. The inflation rate was 9.2 percent in December and reached a record high of 10.6 percent last October.

Analysts had expected an inflation rate of 8.9 percent for January. In a month-on-month comparison, prices fell by 0.4 percent in January. With the decline in January, inflation has eased for the third month in a row.

Energy prices fuel inflation

Energy prices fueled inflation in January, albeit at a slower pace. At 17.2 percent, they remain the main factor behind inflation after 25.5 percent in December. Food, alcohol and tobacco prices rose 14.1 percent from 13.8 percent in December. Non-energy industrial goods rose 6.9 percent in January. In December, the increase was only 6.4 percent. And services rose at the beginning of the year by 4.2 percent after 4.4 percent in December.

On the other hand, core inflation, which excludes the volatile prices for energy and food, remained unchanged in January at 5.2 percent, as in the previous month. It is thus still at its highest level since the introduction of the euro and shows that the strong price increases are not only affecting energy and raw materials. Economists attach particular importance to core inflation because it indicates how costs are passed on from companies to consumers. This can result in second-round effects in the form of higher wage demands, which can ultimately lead to a price-wage spiral.

ECB rate hike expected on Thursday

The European Central Bank (ECB) is likely to take the slowdown in inflation before its interest rate decision on Thursday with some relief, although there is no reason to give the all-clear yet. The inflation rate is still miles away from the ECB’s target of two percent. Before the turn of the year, the central bank had slowed down its high pace of interest rate hikes to just 0.50 percentage points. At the interest rate meeting on Thursday, the financial markets are also firmly expecting a further interest rate hike of 0.50 percentage points in order to get the high inflation under control.

Eurostat did not release an estimate for Germany. For technical reasons, the figures from the Federal Statistical Office will exceptionally not be published until next week. Inflation in Germany had been close to the EU average in recent months.

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