Euro zone inflation held steady as expected last month, taking a break in what is likely to be a temporary but sharp spike in consumer prices in the coming months, data showed today.
Prices in the euro zone rose by 0.2% on the month in January and 0.9% compared to a year earlier, in line with analyst expectations, a flash estimate from Eurostat, the European Union’s statistics office, showed.
Prices are likely to rise further, driven by a slew of one-off factors, and inflation could even exceed the European Central Bank’s 2% target in the coming months.
This will challenge the bank’s projection for a 1% average inflation rate this year.
But the upside surprises are unlikely to prompt the ECB to tighten policy, as the spike is considered temporary and inflation is likely to fall sharply towards the end of the year, staying well below the ECB’s target for years thereafter.
Much of the monthly price increase was driven by rising food and fuel prices but the growth in underlying prices slowed, another reason for the ECB not to hurry with policy tightening.
Prices excluding volatile food and energy prices, which the ECB define as core inflation, slowed to 1.2% from 1.4% a month earlier.
An even narrower measure of inflation, which excludes alcohol and tobacco prices, also slowed to 1.1% from 1.4%.
The rebound in crude oil prices and the reversal of the German value added tax cut are the biggest factors driving inflation higher this year while new weights in the inflation basket also had an impact.
But central banks have little sway over prices in the near term so they tend to look through temporary swings. ECB officials have already made clear they will live with this year’s spike.
Instead of tightening policy on higher inflation, the ECB may actually ease further, possibly as soon as its March 11 meeting, to counter a recent rise in nominal yields, which threatens to choke off growth by making borrowing more expensive.
“Headline inflation will almost certainly rise further in the coming months, to around 2% due to further rises in food and energy price inflation,” ABN Amro said in a note before the data release.
“However, it will very likely be a one off – leading to a sharp drop in inflation as the disinflationary pressures from the economic shock come to the fore,” it added.