Core inflation in the eurozone has eased for the first time since September, despite ongoing reports from businesses about rising input costs. This decline comes as global markets remain tense due to the ongoing Russia-Ukraine conflict and anticipated US tariffs on imports from China, Mexico, and Canada. Following a robust beginning to 2023, February's eurozone inflation figures revealed a softer trend, with headline inflation dropping from 2.5% to 2.4% and core inflation declining from 2.7% to 2.6%.
The European Central Bank (ECB) is monitoring these developments closely, expressing concern over how low inflation might fall. Despite the decline in core inflation, the Harmonised Index of Consumer Prices (HICP) for core inflation saw a 0.6% increase on a monthly basis in February. This mixed picture leaves investors and policymakers alike in anticipation, particularly as the Institute for Supply Management is set to release the February US Manufacturing Purchasing Managers’ Index (PMI) on Monday, a report eagerly awaited by investors.
As the ECB deliberates on its next steps, it faces the challenge of balancing interest rate cuts with the risk of overshooting. Some members express caution, fearing that a significant reduction could destabilize the market. Despite these concerns, the ECB is expected to announce a 0.25 percentage point cut in interest rates later this week, a move seen as necessary by many to maintain economic stability and encourage domestic demand.
The soft inflation reading has led to the perception that inflationary pressures may be easing, contributing to views that current inflation levels are relatively benign. This development is part of a broader trend where the eurozone is anticipated to gradually pull away from stagnation as domestic demand strengthens.
Furthermore, discussions within the ECB are heating up regarding when they might reach their terminal rate. The upcoming decision on interest rates is expected to spark a fiercer debate among ECB members about the appropriate timing and magnitude of further rate adjustments.