Consumer prices in the eurozone increased by 2.4% year over year in February, according to today’s Eurostat flash estimate, lower than January’s reading of 2.5% year over year but slightly above expectations.
And core inflation, which shows prices without energy and food costs, is expected to be 2.6% year over year in February, slightly below 2.7% in January, after having been static for five months.
“Investors will be glad to see inflation fall back in February, having risen for four months straight. Although behind expectations, today’s announcement brings 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.”
As for core inflation, Fields adds that this number has resumed its downward trajectory, having been static for five months.
“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,” Field adds.
In February, services are expected to have risen by 3.7%, compared with 3.9% in January, followed by food, alcohol and tobacco (2.7% versus 2.3% in January), nonenergy industrial goods (0.6%, compared with 0.5% in January), and energy (0.2%, compared with 1.9% in January).
Inflation in the Eurozone: Weaker Data in France and Italy
Eurozone countries have so far reported mixed inflation figures. The flash estimate of French headline inflation was 0.90% year over year, down from 1.8% year over year in January, and below consensus. In Italy, flash HICP was broadly unchanged compared with January at 1.70% year over year. Both countries saw a slowdown in service inflation.
German headline inflation was above expectations at 2.8% year over year, and in line with January figures, driven by food prices. Also, Spanish flash HICP inflation was above the consensus expectations at 2.9% year over year in February, the same level as January, due to upward pressure from electricity prices.
Will the ECB Cut Rates at the Next Meeting?
The next ECB monetary policy meeting will take place in Frankfurt later this week, and another 25 basis points cut is expected to be announced on March 6. However, economists are seeing less room for further rapid rate cuts.
“Opinions within the ECB are increasingly divided on how many rate cuts can be expected in the coming months, how quickly they will be implemented and whether the current monetary policy is already restrictive,” said Ulrike Kastens, senior economist at DWS, on Feb. 28.
The ECB’s next growth and inflation forecasts will be closely scrutinized by the markets.
“Considering the weak confidence indicators, we expect the GDP forecast for 2025 to be further revised downward from the current 1.1%,” said Kastens. As for inflation, she expects the 2% target to be reached, but with slight deviations above and below this level.
“Given the high level of economic and political uncertainty, the ECB is likely to continue to adopt a data-driven approach, evaluating decisions meeting after meeting,” the DWS economist added. She also sees the deposit rate around 2.0% by the summer.
US Inflation in Line With Expectations
In the US, the Personal Consumption Expenditures Price Index increased 2.5% year over year, in line with expectations, according to the US Bureau of Economic Analysis. Excluding food and energy costs, the Federal Reserve’s preferred measure of inflation was up 2.6% year over year.
“With a 2.6% year-on-year increase in consumption, inflation is still a little higher than the Fed would like, and this figure probably keeps the US central bank on hold in the short term,” said John Lloyd, portfolio manager at Janus Henderson.
“We continue to believe that to start cutting the rates again, the Fed must want to see weaker inflation or a lower unemployment figure.”
Economists expect that the Federal Reserve should be more cautious than the ECB in cutting interest rates. The economics team at Schroders believes the Fed has ended its easing cycle and expects an increase of 50 basis points in 2026.
“Every indicator points to an overheating economy, suggesting that the neutral rate is much higher than the Fed’s estimate of 3% and that rate hikes will be necessary,” they said in a note on March 3.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
