Markets are looking ahead to flash data on eurozone inflation, which will be released by Eurostat on March 3, ahead of the European Central Bank’s meeting on March 6.
Headline inflation is forecast to be 2.3% higher than February 2024 levels, according to FactSet consensus estimates, and down from the January reading of 2.5% year on year .
Core inflation, which shows prices without energy and food costs, is expected at 2.6% year on year in February, down from January’s 2.7%.
“If the economists are correct in their forecasts, then investors will be glad to see inflation fall back in February, having risen for four months straight. Expectations are for a 20 basis point fall to 2.3%, bringing us closer to the ECB’s 2% targeted level” says Michael Field, chief equity market strategist for Europe at Morningstar.
“While we try not to place too much stock in single month movements in inflation numbers, the reversal of the upward trend in inflation will certainly be taken well by equity markets, helping to remove any doubts around the ECB’s interest rate cutting strategy.”
Field also added that the expected minor fall in core inflation, “is a case of every little helps here, with a resumption in the downward trajectory of this number, having been static for five months.”
In January 2025, service inflation remained the main driver of headline inflation (HICP), with its contribution at 1.77 percentage points (pp). The contribution of food, alcohol and tobacco stood at 0.45 pp, and the contribution of energy at 0.18 pp. Non-energy industrial goods provided a 0.12 pp boost.
Can the 2% ECB Target Be Achieved This Year?
“The year-on-year figures are expected to continue to show good progress towards the 2% target over the course of the year,” Antonella Manganelli, CEO at fund company Payden & Rygel Italia, told Morningstar on Feb. 24.
Anthony Willis, Investment Manager at Columbia Threadneedle Investments, sees a risk of inflation picking up in February, “given the persistent strength of services inflation and the increase in energy prices, with the drop in the price of oil having been compensated by the increase in the price of gas.” He adds that in the short term, both headline and core inflation will probably remain above the 2% ECB target, “but over time the 2% target should be achievable.”
How Will Trump’s Tariffs Impact Eurozone Inflation?
US President Donald Trump threatened a 25% tariff on imports from the European Union, saying that they will be announced “very soon”.
“Europe’s response to Trump will be important in determining the ultimate impact that tariffs have on the euro area – on both inflation (via the effect of tariffs on import prices) and economic growth (via the effect on European imports, as well as the initial effect on exports),” Nomura said in a mid-February note, adding that the potential impact on Eurozone inflation is difficult to gauge, but should be limited.
Nomura also stressed the “disinflationary effect” that US tariffs on China could have for Europe. “One argument is that with China-US trade being hit, China might refocus its attention on supplying its goods to other markets such as Europe, raising the potential for a disinflationary effect,” they said.
What Does Lower Inflation in the Eurozone Compared to the US Mean?
In January, eurozone inflation rose for the fourth month in a row, but it remains lower than the US Consumer Price Index (CPI) that rose 3.0% on an annual basis last month, an uptick from 2.9% in December. Also, core CPI was higher in the US than in the eurozone in January (3.3% vs 2.7%). This data, together with the divergence in economic growth between the United States and the eurozone, suggests a different approach by the ECB and the Federal Reserve.
“PIMCO expects the ECB to cut rates more aggressively than the market currently expect, to a final rate of around 2%. This view is supported by the weak economic environment and progress in disinflation. On the contrary, the US Federal Reserve should be more cautious in cutting rates due to the resilience of the US economy and the potential inflationary impact of tariffs,” said Nicola Mai, economist and sovereign credit analyst at PIMCO in a note on Feb. 17th.
According to Preston Caldwell, Morningstar senior US economist, January’s inflation data “throws cold water on the notion of another Fed rate cut until at least this May.”
Morningstar’s Field highlights that “with the gap widening between US and European inflation, and the gap between GDP growth narrowing, European equities are being increasingly viewed as an attractive place for international investors to look.”
What Will the ECB Do in Its March Meeting?
The next ECB monetary policy meeting will take place in Frankfurt on March 5th and 6th, and the institution is expected to announce a 25 basis point rate cut, for the second time in 2025. After its Jan. 30 meeting, the deposit facility rate stands at 2.75%.
Interviewed by Morningstar on Feb. 25th, Willis from Columbia Threadneedle Investments said that the rate cuts are “likely” at the next meeting in March,” provided that members don’t change their minds about the economic outlook.” During the past ECB meeting, President, Christine Lagarde warned that “the risks to economic growth remain tilted to the downside”.
Willis added that “there are already signs that after the March cut, the European Central Bank may adopt a “wait and see” attitude as summer approaches, to confirm that its forecasts of lower inflation are correct, thus allowing for further rate cuts later in the year.
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