Eurozone: inflation sinks slightly to 2.8%

Inflation rates in the Eurozone fell slightly in January, the Eurostat statistics office in Luxembourg announced on Thursday, keeping alive speculation about interest rate cuts coming soon.

Consumer prices in January increased 2.8% compared to 2.9% in December.

Analysts had expected a slightly bigger drop to 2.7%, but the European Central Bank (ECB) is still happy with progress towards its medium-term goal of 2%.

"The pressure on prices is decreasing and this should continue to be the case in the months to come," commented Thomas Gitzel, chief economist at Lichenstein's VP Bank. "The ECB's target of 2% should soon be in touching distance."

Food and semiluxury goods became 5.7% more expensive in January compared to the previous year, down from 6.1% in December. Energy prices also dropped significantly again, although the rate of decrease had slowed. Services, on the other hand, were up 4%.

Inflation problem not solved yet

"At first glance, it is encouraging that inflation has fallen again, but the price pressure on services has increased for the third month in a row," said Alexander Krüger of the private bank Hauck Aufhäuser Lampe in Frankfurt. "The inflation problem has not been solved yet."

As for whether the ECB could soon be prepared to consider interest rate cuts again, Fritzi Köhler-Geib of the German state-owned investment development bank KfW cautioned that the continuing "fragile geopolitical environment" would lead it to wait.

One major such geopolitical factor is the continuing disruption to commercial shipping in the Red Sea as a result of attacks by Iranian-backed Houthi rebels in Yemen, affecting an estimated 12% of total container transports.

But ECB chief economist Philip Lane said that this has not affected inflation rates, partly because global demand for goods has also fallen compared to two years ago, when there had been a squeeze.

mf/sms (Reuters, AP, dpa)