© Reuters. FILE PHOTO: Shoppers buy fruits at a local market in Nice, France, June 8, 2023. REUTERS/Eric Gaillard/File Photo
FRANKFURT (Reuters) – Euro zone inflation eased as expected last month but underlying price pressures fell less than forecast, likely boosting the European Central Bank’s argument that rate cuts should not be rushed, even if the next move is still going to be policy easing.
Consumer inflation in the 20 nations sharing the euro dipped to 2.8% in January from 2.9% in December, in line with expectations and inching towards the ECB’s own 2% target, data from Eurostat, the EU’s statistics agency, showed on Thursday.
Price growth, now a long way from its peak in double digit territory in late 2022, fell as unprocessed food, energy and industrial goods inflation all slowed.
But underlying price growth, a key measure watched by the ECB because it excludes volatile food and energy costs, only dipped to 3.3% from 3.4% and came above forecasts for 3.2%.
The mild disappointment came as services inflation held steady at 4.0%, pointing to lingering price pressures, particularly from wages.
Although the ECB was adamant last week that a rate cut is not even being discussed, policymakers are sounding increasingly confident that inflation is coming under control, suggesting that the bank was nearing an easing cycle.
These bets got another boots overnight when U.S. Federal Reserve Chair Jerome Powell took a similarly upbeat tone, openly discussing the possibility of rate cuts, even if he said March was likely too soon.
For the ECB, investors now see a combined 142 basis points of rate cuts this year, with the first step in April nearly fully priced in. Markets then see the ECB cutting at each meeting this year.
Although the ECB has pushed back on market bets, the actual gap between the sides is rather small and the debate is on whether the first cut should come in April or June, a minor difference given that monetary policy works with a lag of 12 to 18 months.
The ECB itself expects inflation to reach its 2% target only in 2025 but market economists and even the bank’s own vice president are openly discussing the possibility of faster disinflation.
Energy prices are lower than predicted, overseas trade remains weak, wage growth had defied pessimistic expectations and the labour market has started to soften, all pointing in the direction of easing price pressures.
The problem is that a quicker decline in inflation would mean that real — or inflation adjusted — interest rates rise, so the ECB would be effectively tightening policy just when prices were coming under control and easing is getting discussed.
