Eurozone inflation cools, but not as much as expected

The European Central Bank is pictured in Frankfurt, Germany, Wednesday, July 26, 2023.
The European Central Bank is pictured in Frankfurt, Germany, Wednesday, July 26, 2023. Copyright AP Photo/Michael Probst
By James ThomasPiero Cingari
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Falling inflation figures from the Eurozone and its biggest economies will come as a relief to the ECB, which makes its next interest rate decision next week.


Inflation in the Euro area slowed to 2.6% in February year-on-year, down from 2.8% the month before but not quite as low as the 2.5% analysts had predicted.

Eurostat's preliminary estimate, released on Friday, shows that the consumer prices in the Eurozone are rising at their slowest rate in three months, but they're still hovering above the European Central Bank's (ECB) target inflation rate of 2%.

Key components and trends

Among the main components of euro area inflation, food, alcohol, and tobacco are projected to have experienced the highest annual rate in February at 4.0%, down from 5.6% in January.

Services followed closely with a rate of 3.9%, compared to 4.0% in January. Non-energy industrial goods witnessed a decrease to 1.6% from 2.0% in January. Energy prices declined by -3.7% compared to -6.1% in January.

The CPI index rose by 0.6% from January, marking a sharp reversal from the 0.4% drop seen the previous month, and the most rapid acceleration since April 2023. Energy items increased by 1.5% from January, while services rose by 0.8%.

Excluding energy and food items, the core inflation rate eased from 3.3% to 3.1% in February 2024 from a year earlier, marking the lowest rate since March 2022, but surpassing estimates of a decline to 2.9%. The monthly variation in the core inflation rate was 0.7%, the largest increase since April 2023.

During her recent address at the plenary session of the European Parliament, ECB President Christine Lagarde reiterated the prevailing view that the current disinflationary trend is anticipated to persist. However, she emphasised the necessity for the governing council to maintain confidence that this trajectory will ultimately guide the economy sustainably towards the targeted 2% inflation rate.

Differences across Member States

There were contrasting inflationary trends within the euro area, underscoring the diverse economic conditions between Member States.

Croatia recorded the highest annual inflation rate in February 2024 at 4.8%, while Italy experienced the lowest at 0.9%. Belgium saw the highest month-on-month inflation increase at 2.4%, followed by France and the Netherlands, both at 0.9%.

On Wednesday, flash estimates for the inflation rate in Germany revealed a faster-than-expected decline. The annual change in the CPI basket stood at 2.5% in February 2024, down from 2.9% previously and below the anticipated 2.6%.

Conversely, inflation surprised to the upside in France and Spain, exhibiting a slower-than-expected decline in both countries.

Market reactions

Market expectations of rate cuts by the European Central Bank have persisted, albeit with a diminishing outlook compared to a month ago.

In early February, speculators bet on over 160 basis points of cuts, implying six rate cuts by 25 basis points fully priced by the end of the year. However, this forecast has now shrunk to four cuts.

The euro remained relatively stable against the dollar at 1.0810 following the inflation release.

Bond yields retraced their upward trend after lower-than-expected inflation in Germany reversed the upsurge in yields following France's and Spain's hotter prints.

Yields on the 10-year Bund traded at 2.40% on Friday, down by about 10 basis points from Thursday’s highs.

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