In February, eurozone inflation decreased to 2.4% year-on-year, down from 2.5% in January, primarily due to lower energy prices. Core inflation also saw a slight drop to 2.6%. The European Central Bank is expected to announce a sixth interest rate cut, reducing the benchmark rate to 2.50%. While overall inflation has eased since a peak of 10.6% in October 2022, challenges remain, particularly in Germany and France, affecting the economic outlook.
Eurozone Inflation Declines in February
In February, the eurozone experienced a slight reduction in inflation after four months of continuous increases, signaling a potential rate cut by the European Central Bank (ECB) scheduled for Thursday. According to Eurostat, consumer prices rose by 2.4% year-on-year across the 20 nations using the euro, largely due to a decrease in energy costs.
Key Economic Indicators and Trends
In January, the inflation rate had reached 2.5%, with analysts from Factset projecting an even more significant drop to 2.3% for February. Notably, inflation had dipped to 1.7% in September, marking a three-and-a-half-year low, but has since exceeded the ECB’s target of 2% since October.
Encouragingly, core inflation, which excludes volatile energy and food prices and serves as a key reference for the ECB, slightly decreased to 2.6% year-on-year in February, aligning with Factset’s expectations. This figure had remained steady at 2.7% from September to January.
Overall, the eurozone has seen a significant easing in price increases since the record high of 10.6% year-on-year in October 2022, a surge largely driven by escalating energy prices due to the ongoing conflict in Ukraine. This change has enabled the ECB to implement five interest rate cuts since June, as the focus has shifted from inflation concerns to growth stabilization. The ECB anticipates inflation will sustainably return to the 2% target by the end of this year.
The European economy has been experiencing stagnation for the past two years, with a challenging outlook for 2025, particularly due to slowdowns in Germany and France, the two largest EU economies. Additionally, potential tariffs from the U.S. and uncertainties surrounding Ukraine pose further risks to economic activity.
The ECB is expected to announce a sixth interest rate cut on Thursday, reducing the benchmark deposit rate from 2.75% to 2.50%, following a 0.25-point decrease. This will mark a total reduction of 1.5 points since the historic high of 4.0% in September 2023, aimed at countering the surge in prices.
By gradually lowering interest rates, the ECB aims to facilitate credit access and foster economic recovery. The decline in inflation during February can primarily be attributed to stable energy prices, which saw only a 0.2% year-on-year increase compared to 1.9% in January. Service sector inflation also experienced a slight slowdown, dropping to 3.7%.
Conversely, food prices, including alcohol and tobacco, rose more sharply in February to 2.7%, up from 2.3% the previous month, while the increase in industrial goods prices slightly accelerated to 0.6%.
Jack Allen-Reynolds from Capital Economics suggests that while inflation is likely to remain near current levels for the upcoming quarters, the reduction in service inflation in February may signal the beginning of a trend leading to a significant drop in core inflation this year. He anticipates a more substantial interest rate reduction by the ECB than many analysts predict.
Looking at individual countries, France recorded the lowest inflation in February at 0.9% year-on-year, followed by Ireland at 1.3% and Finland at 1.5%. In contrast, Estonia (5%), Croatia (4.7%), and Belgium (4.4%) faced the highest inflation rates. Among major economies, Italy (1.7%) outperformed both Germany (2.8%) and Spain (2.9%).