Key Takeaways
- Preliminary euro-area inflation fell to 1.7% year over year in January according to Eurostat estimates, down from 1.9% in December.
- Core inflation stood at 2.2% year over year, down from 2.3% in December, and also below the consensus forecast of 2.3%.
- The ECB is not expected to change rates on Feb. 5, but talk of cuts later in 2026 is likely to reignite.
Consumer prices in the eurozone increased by 1.7% year over year in January, according to Eurostat’s flash estimate, down from December’s reading of 1.9%. This was significantly below consensus estimates of a 2.0% rise, and below the European Central Bank’s 2% target. This is the lowest rate in more than a year as energy price inflation slumped.
The data comes one day ahead of the ECB governing council’s first monetary policy meeting of 2026, on Feb. 5.
Core inflation, which shows prices without volatile components such as energy and food costs, came in at 2.2% in January, also lower than economists expected and below December’s reading of 2.3%.
Equity and currency markets’ reaction to the inflation data was muted. The strong euro, which currently trades at around 1.18 against the US dollar, is seen as disinflationary as imports become cheaper for buyers in the eurozone.
“Euro inflation has fallen to its lowest rate in more than a year, at just 1.7%,” says Michael Field, chief European markets strategist at Morningstar. “Although this falls below the ECB’s 2% target, it is unlikely to prompt the bank into an immediate response this week, such as a rate cut.”
“That said, equity markets will take this as yet another signal that inflation is well and truly under control in Europe and that interest rates are likely to fall further during 2026,” according to Field.
Core inflation is still 20 basis points above the ECB’s targeted rate, but it has come down markedly over the course of the last year, Field adds. “But with headline inflation now below the target level, the ECB should be leaning more towards igniting economic growth in 2026.”
Energy Price Slump Pumps Brakes on Overall Inflation
According to Eurostat’s estimates, services inflation remained the highest contributor at around 3.2% in January, below December’s 3.4%, but still the key driver of core inflation. Food, alcohol and tobacco prices were up by 2.7%, while non-energy industrial goods prices rose by 0.4%, slightly up from December.
By contrast, energy prices fell by 4.1% year on year in January, compared with a 1.9% decline in December.
Will the ECB Cut Rates on Feb. 5?
The lower-than-expected inflation data is likely to reignite the debate around the ECB lowering rates in 2026.
Austria’s central bank governor Martin Kocher told the Financial Times in a recent interview that “If the euro appreciates further and further, at some stage this might create, of course, a certain necessity to react in terms of monetary policy.”
“Going into the February meeting, we expect the ECB to leave the deposit facility rate unchanged for the fifth time in a row, at 2%,” Konstantin Veit, portfolio manager at Pimco, said on Jan. 31. “While some debate remains around medium‑term inflation risks, we think the governing council will look through modest, energy‑driven deviations from target and maintain rates for the foreseeable future as wage and services inflation continue to normalize.”
Oxford Economics expects the ECB to stick to its data-dependent, meeting-by-meeting approach.
“After a solid GDP print in Q4 2025, surveys indicate a continued steady, if moderate, expansion to start the year and the softening in inflation is broadly in line with the ECB baseline,” Oxford Economics says.
“The rise of the EUR/USD to as high as 1.20 is set to be a key talking point,” the company’s chief Germany economist Oliver Rakau adds.
“But we don’t expect a significant verbal intervention. The euro has fallen back below this psychological threshold, and signs of a solidifying domestic recovery and higher energy prices are set to constrain the central bank’s ability and need to respond, unless the euro appreciates much more,” Rakau says, adding that risks are tilted towards more easing in the near term.
A Mixed Inflation Picture Across the Eurozone
Inflation rates varied widely across the bloc, with annual inflation rates ranging from just 0.4% in France to 4.2% in Slovakia.
German inflation came in at 2.1%, while Italy and Spain posted annual rates of 1.0% and 2.5%, from 1.2% and 3.0% in December, respectively. Dutch inflation stood at 2.2% year over year, down from 2.7% in December.
