Eurozone Inflation Slows to Lowest Level in Over Year

Inflation across the euro area cooled more sharply than expected in January, dropping below the European Central Bank’s 2% target and reinforcing market expectations that policymakers will maintain a cautious stance on interest rates in the months ahead.

According to data released by Eurostat on Wednesday, consumer prices in the 20-member eurozone rose 1.7% year-on-year in January, marking the weakest reading since September 2024 and aligning with the median forecast of economists surveyed by Bloomberg.

The slowdown extended beyond headline inflation. Core inflation, which excludes volatile food and energy prices and is closely watched by policymakers, unexpectedly fell to 2.2%, while services inflation eased to 3.2%, offering tentative signs that price pressures in the most persistent sectors may be starting to recede.

The inflation data were published ahead of the European Central Bank’s first policy meeting of 2026, where analysts widely expect officials to hold interest rates steady at 2% for a fifth consecutive meeting on Thursday.

After repeatedly missing its inflation target over the past two years, the ECB now sees price growth converging back toward its objective, placing policymakers in what they describe as a broadly “comfortable” position. Still, the debate inside the Governing Council is far from settled.

A minority of officials remain concerned that inflation could stay below target for an extended period, particularly if the euro continues to strengthen, an outcome that would further dampen imported price pressures.

Despite the overall cooling trend, inflation in the services sector continues to draw scrutiny. ECB President Christine Lagarde has warned that the disinflation process could face delays due to slowly easing wage pressures, which remain a key driver of service-sector prices.

The persistence of these costs complicates the ECB’s task, as officials attempt to balance evidence of easing inflation against the risk of declaring victory too early.

The inflation picture remains highly fragmented across the eurozone. In Germany, inflation edged up slightly above expectations to 2.1%, while France recorded an unexpectedly low reading of just 0.4%, its weakest level in five years.

Such divergence underscores the challenge facing the ECB as it sets policy for economies experiencing vastly different price dynamics, growth trajectories, and domestic pressures.

Economic growth in the eurozone has shown modest resilience. The region expanded 0.3% in the final quarter of 2025, a slightly faster pace than anticipated. However, downside risks remain firmly in place.

Recent threats by former U.S. President Donald Trump to impose tariffs linked to disputes over Greenland have revived concerns about trade tensions, adding another layer of uncertainty to an already fragile outlook.

Against this backdrop, ECB policymakers reiterated in December their commitment to maximum flexibility in steering the future path of interest rates, emphasizing that decisions will remain strictly data-dependent.