Eurozone Inflation Falls Below 2% Target

(RTTNews) - Eurozone inflation dropped below the 2 percent target in January on falling energy prices and a stronger euro, official data showed on Wednesday.

The harmonized index of consumer prices rose 1.7 percent on a yearly basis in January, as expected, following December's 2.0 percent increase, flash data from Eurostat revealed.

Excluding volatile prices of energy, food, alcohol and tobacco, core inflation slowed marginally to 2.2 percent from 2.3 percent a month ago.

The update comes a day before the European Central Bank's interest rate decision. In December, the ECB had kept its policy rate unchanged and raised its inflation projection for next year as policymakers forecast services inflation to ease more slowly than expected earlier.

The benchmark deposit rate was retained at 2 percent. Previously, the Eurozone interest rates were revised in June, when they were lowered by a quarter-point.

Data today showed that services cost registered its biggest annual increase in January, up 3.2 percent. This was followed by a 2.7 percent rise in food, alcohol and tobacco prices.

Meanwhile, energy prices declined at a faster pace of 4.1 percent. Non-energy industrial goods prices posted an annual growth of 0.4 percent.

Month-on-month, the HICP was down 0.5 percent in January. January Purchasing Managers' survey results, published by S&P Global today showed a build-up of inflation, with increases in both input costs and output charges accelerating to rates which were in excess of their respective survey averages.

According to the survey, euro area private sector logged its weakest growth in January due to the weakening of growth in services activity. The final composite output index posted 51.3 in January, the lowest score since last September.

The ECB is not currently particularly concerned about inflation, as the inflation target of 2 percent appears to have been achieved, Hamburg Commercial Bank Chief Economist Cyrus de la Rubia said.

However, it is still worth keeping a close eye on services inflation, as it remains quite sticky and if energy prices rise again, as they are currently doing due to the cold weather, the calm could quickly come to an end.

In this respect, policymakers will be a bit concerned by the significant rise in cost inflation in the services sector and the visible increase in sales prices inflation that was signaled by the PMI, de la Rubia said.

"At its meeting on February 5, at which key interest rates are expected to remain unchanged, the ECB could refer to this very point," the economist added.

"While we don't expect a cut, this will add fuel to the more dovish debates around the table at the European Central Bank's governing council meeting," ING economist Bert Colijn said.

Another data from Eurostat today showed that producer prices continued to fall in December. Producer prices slid 2.1 percent year-on-year after easing 1.4 percent in November.

On a monthly basis, producer prices dropped 0.3 percent, reversing November's 0.7 percent increase.