Inflation in the euro area slows to weakest pace since May as fuel drops

ECB president Christine Lagarde. Photo: Alex Kraus/Bloomberg

Sarah Collins

February 01 2023 11:16 AM

The European Central Bank is set to hike rates by half a point tomorrow despite inflation easing in January.

Prices in the 20-member eurozone rose by an average of 8.5pc in January, compared to the same month a year before.

The figure is down from 9.2pc in December, a flash estimate from Eurostat, the EU’s statistics agency, shows.

Irish inflation came in at 7.7pc in January, below the euro area average.

It is the third month in a row that the Irish inflation rate has fallen, suggesting price hikes have passed their peak here.

Eurostat said energy prices rose 17.2pc across the eurozone in January, slowing sharply from 25.5pc in December.

However, food prices are still accelerating, rising 14.1pc compared to 13.8pc in December.

Prices of industrial goods (minus energy) are also accelerating, rising 6.9pc in January.

Services prices rose 4.2pc, a slight easing on December.

Underlying inflation - minus volatile food, energy, alcohol and tobacco costs - was flat at 5.2pc in January, still well above the EU’s 2pc target.

Month on month, prices fell by 0.4pc in the eurozone and by 0.8pc in Ireland.

Monthly inflation fell in around half of the eurozone countries.

A look across the eurozone shows annual prices increases are accelerating in France, Spain, Estonia Latvia and Austria.

However, ING’s senior eurozone economist Bert Colijn said the data are difficult to interpret as estimates for Germany, the bloc’s largest economy, were not included for this month. Final figures are due on February 23.

European central bankers are due to meet tomorrow in Frankfurt, where they are expected to hike rates by 0.5pc.

That comes after the ECB’s main borrowing rate has risen by 2 percentage points since July last year.

ECB president Christine Lagarde said in Davos last month that the bank will “stay the course” in its fight against inflation, hinting that more hikes are to come.

"For the ECB, the muddied picture of inflation is annoying, but don’t expect it to throw it off course for tomorrow,” Mr Colijn said. "The jump in core inflation in some key countries will be enough for the central bank to confirm its current hawkish stance and add another 50 basis points to policy rates."

Matthew Ryan, head of market strategy at global financial services firm Ebury, said a half-point hike is also likely in March.

“Judging by the recent comments made, it is highly likely that there will be a 50 [basis point] hike in February and March, but the vocalness of the hawkish wing seems to have given the euro a boost in the last few weeks and we doubt that the reaction to the new policy will cause market volatility.”

Flash eurozone figures this week show the eurozone economy avoided shrinking in the final quarter of 2022, as had been expected.

The CSO said this week that the Irish economy grew 12.2pc last year.

The International Monetary Fund upgraded its forecasts for most major economies except the UK this week, as inflation looks like it may have hit a peak.