According to a flash estimate from Eurostat, inflation in the eurozone climbed to 2.5% in January 2025 from 2.4% in December 2024. This rise in inflation marks the fifth consecutive monthly increase, keeping inflation above the European Central Bank’s (ECB) 2% target and highlighting ongoing challenges in stabilising price growth.
The services sector maintained the highest inflation rate at 3.9%, though slightly lower than December’s 4.0%. Inflation for food, alcohol, and tobacco eased to 2.3% from 2.6% in the previous month, while energy prices surged to 1.8%—a sharp rise from just 0.1% in December—driven by geopolitical tensions and supply constraints. Meanwhile, non-energy industrial goods remained stable at 0.5%, reflecting subdued demand for manufactured products. Core inflation, which excludes volatile food and energy prices, held steady at 2.7%, exceeding analysts’ forecasts.
Despite the increase, the ECB maintains confidence in its disinflation trajectory, cutting interest rates five times since June 2024 to 2.75%. ECB President Christine Lagarde reassured markets that “the disinflation process is well on track,” suggesting further rate reductions could be on the horizon. Bank officials attribute the recent volatility to temporary factors, including the base effect from 2024’s energy price collapse and the gradual withdrawal of government subsidies.
ECB forecasts expect wage pressures to ease later in 2025, potentially cooling services inflation, a key driver of domestic price growth. However, inflation disparities persist across the eurozone: Spain and Germany recorded rates close to 3%, while Belgium and Croatia exceeded 4%. In contrast, France and Italy remained below 2%, reflecting uneven economic recoveries across the bloc.
As the ECB balances the need to support growth while managing inflation risks, analysts remain divided on how aggressively rates should decrease. ING commented that although the ECB sees a slowing economy and believes inflation is under control, the pace of rate cuts remains a subject of debate.
