From Morningstar:

The European Central Bank (ECB) held rates steady last week, and the Eurozone is now awaiting flash inflation figures to be released on February 1. The January Harmonized Index of Consumer Prices (HICP) is expected to show a 2.7% increase from the previous year. December saw the highest contribution to euro area inflation from services, food, alcohol & tobacco, and non-energy industrial goods.

Market strategists at Morningstar are expecting a decline in euro area inflation in January, following a rise in December. Despite the reduction, core inflation remains at 3.3%, still above the ECB’s 2% target. The direction of inflation is moving downwards, driven primarily by record high interest rates.

The ECB stated that their interest rate hikes are effectively dampening demand and pushing down inflation. However, geopolitical tensions such as those in the Red Sea present potential upward risks for inflation. Despite this, inflationary impacts may be limited.

Eurozone wages are accelerating, with a 5.3% increase in wages observed in the year leading up to Q3 2023. Despite such increases, the ECB remains cautious about the pace of disinflation. An overall increase in wages and unit labor cost growth could lead to upward inflationary pressures.

The ECB President Christine Lagarde suggested that the Eurozone economy likely stagnated in the fourth quarter, expecting a weaker near-term growth rate with the possibility of a more positive outlook further ahead. Markets anticipate a shift in monetary policy in 2024, with many expecting the first interest rate cut to take place in June.

Given the recent stability in inflation, the ECB may shift its focus to the fragile state of the European economy. While an inflationary resurgence remains an outside concern, the central bank is well-positioned to consider interest rate cuts in 2024.



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