Euro zone inflation was only a touch higher in January than earlier estimated, Eurostat said on Thursday, confirming that price growth is now well past its peak, even if underlying price pressures still show no signs of abating.
Consumer price inflation in the 20 nations sharing the euro eased to 8.6% in January from 9.2% a month earlier, coming in just above the 8.5% estimated earlier this month, when figures from Germany, the bloc’s biggest economy, were not yet included.
The data are still likely to make for grim reading at the European Central Bank (ECB) as revisions show core inflation, or price growth excluding volatile food and fuel products, accelerating to 5.3% from 5.2%, confounding initial data for a steady pace.
The ECB has raised rates by a combined 3 percentage points since July to tame inflation and policymakers are now getting concerned that what was initially an energy cost-driven surge, is now broadening out to impact all sectors.
Indeed, worries about underlying inflation have dominated public commentary from policymakers in recent weeks and some have argued that rate hikes should not stop until there is a clear turnaround in core price developments.
Services inflation, the biggest chunk of core inflation, was revised up to 4.4% from 4.2%, likely worrying some because services primarily reflect wage growth and employee earnings are now rising at their fastest pace in years, even if real or inflation-adjusted growth is still negative.
The issue is that underlying inflation is a better reflection of future price developments, so a rate that holds above the ECB’s own 2% target, raises the risk of a persistent overshooting.
Markets currently price longer-term inflation at just over 2.4% and ECB board member Isabel Schnabel has already said that markets may still be underestimating the persistence of inflation as “broad disinflation” has not yet started.
Schnabel also said that even a turnaround in underlying inflation is not sufficient to stop monetary tightening as the decline in energy costs rather than more persistent components would likely account for the shift.
The ECB has already promised another 50-basis point interest rate hike in March and markets then see another 75 basis points of moves thereafter, putting the rate peak in the vicinity of 3.75%.
Energy price inflation was revised to 18.9% in January from an initial 17.2%, but that is still down from 25.5% in December.
Latvia had the highest inflation in the euro zone with a rate above 21%, while Luxembourg and Spain had the slowest at just under 6%.
