Inflation slows modestly and stands at 8.5% in the eurozone; does not meet projections

The euro area year-on-year inflation it reached 8.5% in February, against 8.6% in January, driven by the increase in food prices, which even exceeded those of energy.

According to numbers from the European statistics agency Eurostat, this is the fourth consecutive drop in the inflation rate, but most analysts and experts expected a more marked contraction and closer to 8 percent.

Eurozone inflation had reached a record high of 10.6% in October 2022. Since then, it began a slow retreat that strengthened the optimism of analysts and experts in a further drop in February.

According to Eurostat, in February the food prices (which are counted in a pack along with tobacco and alcoholic beverages) increased more than those for energy, as they had been for practically all of 2022.

Eurostat pointed out that in February food prices were the main cause of the inflation rate, with an estimated increase of 15.0%, whereas in January they had registered an advance of 14.1 percent.

Conversely, energy slowed down in February, with 13.7%, whereas in January the interannual rate was 18.9 percent.

The last time that food had more weight than energy in the final result of the inflation it had happened two years ago, in February 2021.

From that point on, energy began a strong growth trend, which became critical with the start of Russia’s invasion of Ukraine in February 2022, an event that caused gas prices to increase exponentially in particular.

Thus, the so-called core inflation rose from 5-4% in January to 5.6% in February.

Among the main economies of the Euro zone, Germany experienced a year-on-year inflation rate of 9.3% in February, while in Spain it was 6.1%. France, in turn, exhibited 7.2% and Italy 9.9 percent.

The Baltic countries continue to have the highest inflation rates in the eurozone: Latvia experienced 20.1%, Estonia 18.8% and Lithuania 17.2 percent.

ECB under heavy pressure

The European Central Bank (ECB), responsible for the monetary policy of the countries that have the Euro as their currency, maintains the goal of inflation of approximately 2%, clearly pulverized in 2022.

For this reason, the expectation of analysts now points to a new increase in reference interest rates, which are at a high level of 2.5%.

For expert Jack Allen-Reynolds, from the Capital Economics consultancy, the increase in core inflation “will reinforce the conviction” in the ECB about “significant increases” in rates.

“For some time we have been forecasting a 50 basis point rise at the meeting in two weeks’ time and another in May, but it now looks increasingly likely that there will be further rises at subsequent meetings,” he said.

Paolo Grignani, an economist at Oxford Economics, also noted that the trend in core inflation defines the picture of the trend in the ECB.

The February results set the stage not only “for a rate hike in March, but also pave the way for a similar tightening of monetary policy in the second quarter,” he said.

Bert Colijn, an expert at ING bank, said the February result “is a clear setback, but forward-looking indicators show that the downward trend in inflation will continue.”

In his view, energy inflation could turn negative in the short term, “but the question is how quickly other price categories will experience declines and whether inflation turns out to be more resilient than expected.”