Eurozone Inflation Slows, ECB Contemplates Rate Cut Amid Economic Challenges

The eurozone witnessed a slowdown in its annual inflation rate for February, largely attributed to a cooling in food prices. The European Central Bank (ECB) may consider a key interest rate cut later this year following this development.

According to the European Union’s statistics agency, consumer prices across the 20 eurozone economies rose by 2.6% compared to the previous year, down from 2.8% in January. This trend aligns with the decrease observed in the preferred inflation measure by the Federal Reserve in the U.S., which declined in January.

Although the eurozone's inflation rate slightly exceeded economists' expectations of a 2.5% rise, it has steadily decreased from its peak of 11.6% in October 2022, following Russia’s invasion of Ukraine.

The decline in inflation is attributed partly to falling energy prices, with food prices making a significant contribution in February. Prices for food, alcohol, and tobacco were up by 4.0% year-on-year, compared to a 5.6% increase in January.

Meanwhile, services prices continued to rise rapidly, contributing to the overall inflation rate. Eurostat reported that the core inflation rate, which excludes volatile items like energy and food, remained above target at 3.1%, although slightly down from 3.3% in January.

The ECB, which has held its key interest rate at a record high, may consider rate cuts in the future. However, policymakers are expected to maintain the rate unchanged in the upcoming meeting, while providing more clarity on the timing of potential rate cuts.

Concerns arise from the rapid increase in wages, potentially leading businesses to raise prices further. Additionally, unemployment data released showed a record low rate of 6.4% in January, while wage growth remained strong in the final quarter of 2023.

ECB President Christine Lagarde emphasized the importance of wage growth in driving inflation dynamics, reflecting tight labor markets. While both the U.S. and eurozone experience cooling inflation, the growth trajectories differ significantly. Recent indicators suggest robust growth momentum in the U.S., whereas the eurozone faces stagnation, evident from declining activity in the manufacturing sector.

Cyrus de la Rubia, an economist at Hamburg Commercial Bank, noted that the eurozone's industrial recession persists, indicating ongoing economic challenges.

By fLEXI tEAM