Key Takeaways
- Eurozone inflation increased to 1.9% year over year in February, according to Eurostat estimates; higher than forecast.
- Core inflation stood at 2.4% year over year, up from 2.2% in January, and also above the consensus forecast of 2.3%.
- Potential shocks to oil supply remain crucial indicators of future inflation trends.
Consumer prices in the eurozone increased by 1.9% year over year in February, according to Eurostat’s flash estimate, up from January’s reading of 1,7% and higher than consensus estimates. The rate is just below the European Central Bank’s 2% target.
Core inflation, which shows prices without volatile components such as energy and food costs, came in at 2.4% in February, up from January’s figure of 2.2%.
“Although investors might view the move negatively, context is important,” says Michael Field, Morningstar’s chief European markets strategist. “This number is still below the European Central Bank’s 2% targeted level; a point it has hovered either side of for some time now. Should we be vigilant around the direction of travel? Yes, but is there reason to be concerned now? Absolutely not.”
According to Eurostat’s estimates, services inflation remained the highest contributor at 3.4% in February, up from January’s 3.2%. Food, alcohol and tobacco prices were up by 2.6% stable compared to January, while non-energy industrial goods prices rose by 0.7%, slightly up from January.
By contrast, energy prices fell by 3.2% year on year in February, compared with a 4% decline in January.
How the Iran Conflict Could Push Up Eurozone Inflation
On Feb. 28, the US and Israel launched strikes on Iran. Oil prices spiked as shipping through the Strait of Hormuz, a chokepoint for global oil supplies, slowed to a near standstill over the weekend. Gas prices also jumped on March 2, after Qatar Energy halted LNG production following the targeting of the world’s largest export facility, Ras Laffan, by an Iranian drone attack.
Possible shocks to oil supply and geopolitical risks remain crucial variables for future inflation trends.
“The turmoil in the Middle East will raise energy prices, as oil supply disruption should continue into next quarter and European gas prices will be pushed up due to the need to replenish storage,” says Riccardo Marcelli Fabiani, senior economist at Oxford Economics. “But the impact should not be overstated, due to oil supply gradually starting to outstrip demand again and energy’s small weight in the overall CPI basket.”
According to Richard Flax, chief investment officer at Moneyfarm, the inflationary picture in the European Union “appears more balanced today than in recent years”, however “this scenario is not without risks”, including shock to oil supply.
Will the ECB Cut Interest Rates in March?
The next ECB monetary policy meeting will take place in Frankfurt on March 19, and economists expect interest rates to remain steady.
According to Morningstar’s Field, central bankers “walk a tightrope”, attempting to stimulate the economy without igniting inflation. “But with inflation still below the target level, they should be leaning more towards igniting economic growth in 2026.”
Marcelli Fabiani says any interest rate change by the European Central Bank at the meeting in two weeks is unlikely: “Limited upside from energy prices, services inflation rising on the month but broadly easing, and a very low non-energy industrial goods component mean that runaway inflation is off the table.”
A Mixed Picture Across the Eurozone
Inflation varied widely across the bloc, with annual rates ranging from 1.1% in France to 4.0% in Slovakia.
German inflation came in at 2.0%, weaker than expected. France at 1.1% and Spain at 2.5%, were both above expectations. The consensus was at 0.8% for France and 2.3% for Spain. Italian inflation stood at 1.6%, up from 1.0% in January. Dutch inflation was 2.3% year over year.
