Eurozone inflation slips below ECB target

Eurozone inflation slowed to 1.7 per cent in January, falling below the European Central Bank’s 2 per cent target and reinforcing signs that price pressures across the bloc are continuing to ease. The data mark a meaningful shift after an extended period in which elevated inflation forced policymakers to maintain restrictive monetary conditions despite weakening growth.

The decline was driven largely by lower energy prices, which have been a major source of volatility throughout the inflation cycle. Softer price increases in goods and food also contributed, reflecting subdued consumer demand and easing supply constraints in several member states. Together, these factors suggest that the sharp inflation surge seen in recent years is continuing to unwind.

Underlying inflation trends have also moderated. Core inflation, which strips out energy and food, slowed further, indicating that domestic price pressures are gradually cooling. This measure is closely watched by the ECB, as it provides insight into whether inflation is becoming entrenched through wages and services rather than driven by external shocks. Progress on core inflation strengthens the case that restrictive policy is having the intended effect.

The data arrive against a fragile economic backdrop. Growth across the eurozone remains weak, with manufacturing activity under pressure and household spending constrained by high borrowing costs. While easing inflation offers relief to consumers and businesses, policymakers remain cautious about moving too quickly, particularly as wage growth remains elevated in some sectors.

For the ECB, inflation below target complicates the policy outlook. Reduced price pressure lowers the urgency to keep rates high, but officials are wary of easing prematurely and risking a rebound. The central bank has repeatedly stressed that decisions will be guided by incoming data rather than fixed timelines.

Financial markets have reacted by increasing expectations of gradual policy easing later in the year, provided inflation remains contained. Bond yields edged lower following the release, while the euro softened modestly as investors adjusted interest rate expectations.

Despite the encouraging headline figure, risks remain. Energy markets remain sensitive to geopolitical developments, and services inflation could prove sticky. The latest data suggest inflation is moving closer to the ECB’s objective, but policymakers are likely to proceed cautiously as they balance price stability against a still-fragile economic recovery.

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