Euro zone inflation fell in January due to a slowdown in food price increases, official data showed on Feb 1, but the drop was more modest than expected by analysts.

Consumer prices slowed to 2.8 per cent in January, from 2.9 per cent in December, the European Union’s statistics agency said.

Analysts surveyed by Bloomberg and FactSet had forecast inflation to slow to 2.7 per cent.

Inflation remains above the European Central Bank’s two per cent target, but well below the peak of 10.6 per cent recorded in October 2022 after Russia’s invasion of Ukraine sent energy prices soaring.

“It’s too soon to declare victory in the inflation battle,” said Mr Peter Vanden Houte, ING bank’s chief Belgium, Luxembourg and euro zone economist.

The data will offer comfort to the ECB that its cautious approach is the right one and that there should not be a rush to cut interest rates, after it paused its unprecedented streak of hikes to combat inflation.

But it will also fuel hopes among some investors that the ECB could cut rates sooner than the summer.

The rise in food and drink prices reached 5.7 per cent in January, compared with 6.1 per cent in December, according to Eurostat.

Energy prices in the euro zone recorded a smaller drop in January of 6.3 per cent, after falling 6.7 per cent the previous month.

Core inflation, which strips out volatile energy, food, alcohol and tobacco prices, and is the key inflation indicator for the ECB, also slowed in January to 3.3 per cent from 3.4 per cent in October. But analysts had expected it to drop to 3.2 per cent.

This will likely worry some in the ECB that risks persist.

“The European Central Bank is especially attentive to the evolution of core inflation. In that regard, the increase in transport prices on the back of the geopolitical tensions in the Middle East remains an inflation risk,” ING’s Mr Vanden Houte said.

ECB chief Christine Lagarde warned last week that tensions in the Middle East posed an “upside risk” to inflation and has repeatedly pushed back against rising expectations of an early rate cut.

There is a growing belief among officials, however, that inflation is being reined in.

Ms Lagarde told CNN International on Jan 30 that Europe was now “on a disinflationary trend” and said the next change in rates would be a cut.

Some economists expect a cut as early as April, while others suggest June, as the ECB weighs inflation concerns against squeezing demand so much it crashes the economy.

“A first cut in June will probably be limited to 25 basis points,” Mr Vanden Houte said.

The US Federal Reserve also kept its key rate at a 23-year high on Wednesday, with chairman Jerome Powell disappointing the markets by dousing hopes of a cut as early as March.

The euro zone economy narrowly dodged a technical recession – two consecutive quarters of contraction – in the second half of 2023 but stagnated in the final three months of the year, Eurostat said on Jan 30.

Across the EU, Finland recorded the lowest inflation rate after consumer prices reached 0.7 per cent in January, according to Eurostat figures.

The inflation rate also dropped in Germany, Europe’s biggest economy, to 3.1 per cent in January from 3.8 per cent in December, the agency’s data showed. AGENCE FRANCE-PRESSE