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Eurozone inflation slowed to 2.8 per cent in January, but the decline in underlying price measures was less than economists expected after stripping out more volatile energy and food costs.
The renewed decline in the headline rate of eurozone inflation, after it briefly ticked up to 2.9 per cent in December, will support investors’ expectations that the European Central Bank could cut interest rates as early as this spring.
However, the unchanged rate of growth for labour-intensive services prices could encourage the cautious approach of some ECB rate-setters who have said they want to see signs that wage growth is moderating before lowering borrowing costs.
Eurostat, the EU’s statistics arm, said on Thursday that services prices rose at an annual rate of 4 per cent for the third consecutive month in January.
Core inflation, excluding more volatile energy and food costs to give a better idea of underlying price pressures, remained slightly higher than economists expected despite slowing from 3.4 per cent in December to 3.3 per cent in January. Economists had forecast a core rate of 3.2 per cent in a Reuters poll.
“While the eurozone’s headline and core inflation rates both edged down, policymakers are likely to be concerned that disinflation in the services sector has stalled,” said Jack Allen-Reynolds, an economist at consultants Capital Economics.
European government bond yields held on to their earlier gains on Thursday as investors judged the data reduced the odds of an early rate cut by the ECB.
Yields on rate-sensitive two-year German Bunds were up 0.06 percentage points on the day at 2.47 per cent. German 10-year Bund yields, a benchmark for the eurozone, rose 0.05 percentage points to 2.21 per cent. Yields move inversely to prices.
Western central banks are weighing the risk of a resurgence in price pressures if they lower borrowing costs too early against the danger of doing unnecessary damage to growth and jobs by waiting longer than needed.
Jay Powell, chair of the US Federal Reserve, pushed back against investors’ bets it could cut rates as early as March, saying on Wednesday this was not its “base case”. On Thursday, Bank of England governor Andrew Bailey said it needed “more evidence” of disinflation before it would cut rates.
ECB president Christine Lagarde said last week it was “premature to discuss rate cuts” even though inflation was expected to “ease further over the course of the year”.
After the eurozone economy stagnated for much of last year, investors have bet the ECB will respond to the rapid cooling of price pressures by cutting its benchmark deposit rate from its current record high of 4 per cent as early as April.
While annual inflation remains above the ECB’s 2 per cent target, monthly price growth has been trending below that level since last autumn. Between December and January, eurozone prices fell 0.4 per cent.
Annual inflation fell in half of the 20 countries that share the euro and ranged from 0.7 per cent in Finland to 5 per cent in Estonia.
However, several rate-setters have said they want to see more evidence that labour costs are moderating from collective wage agreements in the first quarter of this year after wage growth reached 5.3 per cent last year.
The resilience of Europe’s job market, despite higher borrowing costs and weak growth, was underlined by data published on Thursday showing eurozone unemployment remained at a record low of 6.4 per cent in December. There were 10.9mn jobless people in the region, down 17,000 from a month earlier and 369,000 from a year ago.
Kamil Kovar, an economist at Moody’s Analytics, said the “hot reading” on services inflation “makes a March rate cut [by the ECB] a pipe dream, and raises the bar for a cut in April. A cut in June remains our baseline forecast.”
Additional reporting by George Steer in London