Euro zone inflation eased in January, entering a period of soft price growth that economists predict could last at least a year and keep the European Central Bank (ECB) on hold.
Data released on Wednesday showed that consumer prices across the 21 countries using the euro rose 1.7% in January, down from December and the lowest rate since September 2024. The decline was driven largely by falling energy prices and was broadly in line with forecasts from economists.
A key gauge of underlying inflation, which excludes volatile items such as energy, food, alcohol, and tobacco, also slipped slightly to 2.2% from 2.3% in December. The measure, often watched by policymakers to assess sustained price pressures, showed that services sector prices continued to ease across the region.
The softening of inflation is unlikely to prompt an immediate policy change from the ECB. Analysts widely expect the bank to keep interest rates unchanged when it meets tomorrow, with little prospect of adjustments for the rest of the year. The ECB has projected that inflation will remain slightly below its 2% target in 2026 and 2027, before returning to target levels in 2028.
Inflation in the euro area has been hovering around 2% for over a year, following earlier spikes caused by the economic rebound after the Covid-19 pandemic and the surge in fuel prices triggered by Russia’s invasion of Ukraine in 2022.
Markets and economists remain divided on the ECB’s next move. Some policymakers have recently suggested that both a rate cut and a rate hike are possible, depending on how underlying inflation and economic growth evolve.
Recent movements in the foreign exchange market have added to speculation. The euro’s recent appreciation against the US dollar, partly driven by uncertainty over US President Donald Trump’s policy decisions and concerns about the Federal Reserve’s independence, has sparked some discussions about the potential for a rate cut.
Economists say the current combination of easing energy costs and moderate core inflation provides the ECB with room to maintain its current policy stance without risking renewed price pressures. “The data suggest that the euro zone has entered a period of subdued inflation,” said one market analyst. “For now, the ECB can remain patient while monitoring developments in energy markets and the broader economy.”
January’s figures offer a snapshot of a euro area economy navigating a complex environment, balancing moderate growth, global uncertainties, and lingering effects from past energy shocks. Analysts expect the soft inflation trend to continue through the first half of 2026, reinforcing expectations that the ECB will hold interest rates steady as it gauges the region’s economic resilience.
