By Ed Frankl
The eurozone’s annual rate of inflation slowed again in February as food prices cooled, increasing the likelihood that the European Central Bank will cut its key interest rate later this year.
The European Union’s statistics agency Friday said consumer prices across the 20 economies that share the euro were 2.6% higher than a year earlier, a slowdown in the annual rate of inflation from 2.8% in January.
That drop followed the release of figures Thursday that showed the measure of the annual rate of inflation in the U.S. preferred by the Federal Reserve declined in January.
The eurozone rate was a little hotter than economists expected in a poll by The Wall Street Journal, which saw prices rising by 2.5% on year. Having surged in the wake of Russia’s invasion of Ukraine in early 2022, the inflation rate has fallen steadily from a record high of 11.6% in October 2022.
Falling energy prices have helped pull the inflation rate lower over recent months, but food prices made a big contribution in February. Food, alcohol and tobacco prices were 4.0% higher on year in February, compared with 5.6% higher in January.
Prices of services continue to rise rapidly, even as energy, food and goods prices cool. Eurostat said the core rate of inflation, which excludes volatile items such as energy and food, remained well above its target at 3.1%, albeit cooling from 3.3% in January.
The European Central Bank held its key interest rate at a record high in January, but kept open the door to rate cuts. Its policy makers meet next week, and are expected to once again leave their key rate unchanged, but might give more guidance on the timing of a first rate cut.
One worry for policy makers is that wages are rising more rapidly than they did the decade leading up to the Covid-19 pandemic, and that may lead eurozone businesses to raise their prices further.
Unemployment data also released on Friday showed the jobless rate equalled a record low at 6.4% in January. The most recent figures for wage growth pointed to only a slight slowdown in the final three months of 2023.
“Wage growth continues to be strong and is expected to become an increasingly important driver of inflation dynamics in the coming quarters, reflecting tight labor markets,” ECB President Christine Lagarde told European lawmakers Monday.
While inflation is cooling in both the U.S. and the eurozone, policy makers at the Fed and the ECB face very different growth paths. Recent indicators suggest the U.S. economy has carried last year’s surprisingly strong growth momentum into 2024, while the eurozone appears stuck in stagnation. A survey of purchasing managers also released Friday showed activity in the eurozone’s manufacturing sector declined again in February, and at a slightly faster pace than in January.
“The eurozone’s one-year industrial recession is not coming to an end,” said Cyrus de la Rubia, an economist at Hamburg Commercial Bank.
Write to Ed Frankl at edward.frankl@wsj.com
