Eurozone CPI falls to 1.7%, core inflation reaches near five-year low! European Central Bank "stands pat" expectations reinforced

As European Central Bank officials actively weigh their next steps in interest rate policy, Eurozone inflation has further fallen below the ECB's target of 2%. In January, the Eurozone Consumer Price Index rose only 1.7% year-on-year, down from the previous month's 1.9%, with inflation slowing further, in line with economists' median estimates. This reading also marks the lowest level since September 2024. The data was released on the eve of the ECB's first rate-setting meeting of 2026, with economists generally expecting borrowing costs to remain unchanged at 2% for the fifth consecutive time on Thursday. The core inflation rate, excluding volatile food and energy costs, unexpectedly fell to 2.2% - the lowest since October 2021. The EU statistics office said on Wednesday that the closely watched services inflation index slowed to 3.2%. As shown in the chart above, overall CPI inflation in the Eurozone has further slowed, falling below the ECB's target range. At the time of the release of this data, during the ECB's first rate decision meeting of 2026, economists almost unanimously expect Thursday's decision to show the ECB maintaining borrowing costs at 2% unchanged for the fifth consecutive time. After markets betted that CPI inflation indicators for this year and next year will be lower than the ECB's inflation target, inflation has essentially returned to the ECB's target level, which policymakers generally view as favorable. However, some are still concerned that inflation could persistently remain below the target, leading the Eurozone economy into a soft trajectory. The recent strong rebound of the Euro may exacerbate these concerns. "January inflation may prompt more discussions within the ECB about further monetary easing. The downward trend in services inflation is likely to be seen as a key factor in aligning potential price pressures sustainably with the 2% target, and some members of the ECB's Governing Council may be concerned that this process has gone too far. Combined with the impact of the strong Euro, these issues may be prominent in the central bankers' discussions at this week's meeting," said David Powell, senior economist for the Eurozone at Bloomberg Economics. Meanwhile, some ECB officials are still concerned that the stubbornly high increase in services prices. ECB President Christine Lagarde previously warned that any cooling could be further delayed due to slower wage pressure declines. Among the 21 Eurozone member countries, actual inflation varies. In Germany, inflation is about 2.1%, slightly higher than economists' expectations; while France unexpectedly recorded inflation of 0.4%, the lowest in five years. One factor that may push up prices is a faster pace of economic expansion. Although the Eurozone achieved growth of 0.3% in the fourth quarter of 2025, slightly faster than economists expected, threats of further tariffs on Greenland by US President Donald Trump highlight that risks to Eurozone economic growth still exist. Given this lingering uncertainty, ECB policymakers collectively called for a completely flexible stance on interest rates at the December monetary policy meeting. Among the latest inflation data in the Eurozone, the most notable is undoubtedly France's inflation rate of just 0.4%, the lowest in five years. The core logic behind this is that the decline in manufactured goods prices is more pronounced: INSEE clearly states that the decline in inflation is mainly due to a more significant decrease in manufactured goods prices, especially in clothing and footwear due to seasonal promotions and a significant weakening driven by some exports being forced to divert to domestic sales; and there were more discount days during the statistical period (18 days vs. 13 days in January 2025), making the seasonal price reductions effect stronger. Additionally, there is a significant slowdown in services, especially in medical services: the current pace of service price increases in France has slowed down, with INSEE specifically mentioning that increases in doctor consultation fees are more limited than last year, dragging down service inflation. How do economists view the 2026 ECB monetary policy path? The mainstream expectation can be summed up in one sentence: under the baseline scenario, interest rates are likely to remain unchanged at 2% for the whole year of 2026. A rate cut is a low-probability tail risk scenario, unless inflation continues to remain below the target and services/wages cool more significantly. The latest survey shows that close to 75% of Eurozone economists believe that rates will remain unchanged until the end of 2026.