Consumer prices in the eurozone increased by 2.5% year over year in January, according to today Eurostat’s flash estimate, above expectations and higher than December’s reading of 2.4%. The data release comes as markets react to US tariffs on Canada and Mexico, as well as expected tariffs on the European Union that have yet to be announced.
“Despite market expectations of a fall in inflation, January’s reading has in fact moved in the other direction, rising to 2.5%. With equity markets already rattled on the news of US tariffs, today’s announcement adds more fuel to the fire and will likely raise questions about the pace of European interest rate cuts in 2025,” said Michael Field, chief equity market strategist for Europe at Morningstar.
Core inflation, which shows prices without energy and food costs, rose by 2.7% year over year in January, the same level as December.
“Although this figure stands well in excess of the central bank’s 2% target, core inflation has broadly been on a downward trend,” said Field.
In January, the greatest contributors to the annual euro area inflation rate (HICP) were services at +3.9 percentage points (pp), followed by food, alcohol & tobacco at +2.3 pp, energy at +1.8 pp, and non-energy industrial goods at +0.5 pp.
Inflation in the Eurozone: A Mixed Picture
Eurozone countries reported mixed inflation figures for January.
German headline HICP inflation rose 2.8% year over year in January, in line with consensus expectations. The flash estimate of French headline HICP inflation in January was 1.82% year over year, weaker than consensus expectations, driven by a downward pull from services inflation, with a rise in insurance prices offset by weak transportation prices.
Spanish flash HICP inflation was above consensus expectations at 2.9% year over year in January, 0.1pp above the December figures, with core inflation decelerating by less than expected.
Will the ECB Cut Interest Rates Again at the Next Meeting?
The next ECB monetary policy meeting will take place on March 5. More interest rate cuts are expected, but the ECB President insisted that it will follow a data-dependent and meeting-by-meeting approach and not commit to a particular rate path.
“So far, the ECB’s moderately paced and methodical approach to cutting interest rates has been spot on. But the 75 basis points of cuts expected over the course of this year are premised on inflation remaining under control. Surprise readings like today, showing inflation moving in the wrong direction may give the ECB pause for thought, which would ultimately be a negative for European equity markets,” Morningstar’s Field said.
However, markets are also considering the economic differences within the eurozone and the risk of tariffs.
“Weaker-than-expected German inflation has reinforced the European Central Bank’s (ECB) accommodative bets, which are stronger this morning with fears that Trump would wake up one morning and impose huge tariffs on European imports as well,” said Ipek Ozkardeskaya, senior analyst at Swissquote.
In its first meeting of the year, the ECB cut its deposit rate to 2.75% for the fifth time since June 2024, amid uncertain economic outlook, and fears on US tariffs.
“German inflation data confirmed the downward trend in inflationary pressures, in line with European Central Bank projections,” said Fabio Castaldi, senior investment manager at Pictet Asset Management.
He added that in the ECB’s meeting on Jan.30 President Christine Lagarde had expressed confidence in stabilizing inflation toward the 2% target, attributing this improvement to moderate price increases in various sectors, including services.
What Is the Impact of US Tariffs on Eurozone Inflation?
The Trump administration has just signed executive orders to impose an additional 25% tariff on most imports from Canada and Mexico, as well as an additional 10% duty on all imports from China. He also said that he will hike tariffs on European Union goods very soon, citing the large deficit with the EU.
“Tariffs force, and in some cases provoke, the reaction of countries competing with the US, which tend to devalue their currencies to cushion the negative effect that tariffs have on exports. This has significant implications for inflation in these areas, as devaluation produces higher prices,” said Saverio Berlinzani, senior analyst at ActivTrades.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
