Hot eurozone core inflation raises doubt over downward trajectory

(Alliance News) - February's hotter-than-expected eurozone consumer price index is "a clear setback", but opinion is divided on whether it threatens the downward trajectory of inflation.

According to Eurostat, eurozone harmonised inflation eased slightly to 8.5% in February, from 8.6% in January. However, it had been expected to ease further to 8.2%, according to FXStreet-cited market consensus.

The reading is also considerably above the European Central Bank's 2% target.

Core inflation - which excludes energy, food, alcohol & tobacco - ticked up to 5.6% annually, from 5.3% in January. This was also ahead of market consensus that it would remain unchanged at 5.3%.

"The small decline in headline inflation mixed with a jump in core inflation is far from what the ECB had been hoping for," said ING senior economist Bert Colijn.

The reading was less surprising, given the recent data from Spain, France and Germany, showing an upward trend.

The ECB's next interest rate decision is on March 16. At its last meeting on February 2, the ECB lifted interest rates in the eurozone by 50 basis points, and indicated an intention to enact another 50bp hike in March.

"It is ...important not to put too much emphasis on this one figure. A rate hike at the March ECB meeting is more or less a given at 50 basis points," Colijn noted, adding: "May is still quite some time away."

Whilst the February reading is a "clear setback", ING's Colijn noted that there will be a much faster drop in headline inflation in March, given that the "huge" jump from last March will fall out of the year-on-year comparison.

Eurozone CPI had jumped from 5.8% in February to 7.5% in March last year.

"Energy inflation is set to turn negative soon, possibly already in March. But the question is how fast other price categories will see declines and if inflation proves to be stickier than expected," Colijn continued.

While ING expects food and goods inflation to ease, the "big worry" is wage growth driven inflation in the services sector.

Wage inflation and the tight labour market is also likely to catch the ECB's attention.

Eurostat said the unemployment rate in the eurozone in January was unchanged from December at 6.7%. December's figure was upwardly revised from 6.6%.

"Europe's high inflation problem is showing no signs of easing yet. With ongoing high underlying inflation and food inflation, and no signs of the tight labour market weakening, the ECB is unlikely to end its rate hiking cycle any time soon," Deutsche Bank Research senior economist Peter Sidorov.

The reaction to Thursday's data was muted in foreign exchange trading.

The euro was quoted at USD1.0621 late on Thursday morning in London, little changed from USD1.0632 an hour or so before the CPI release came out.

By Elizabeth Winter, Alliance News senior markets reporter

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