Inflation of the euro zone down, but uncertainty remains

The figure made the markets tick: inflation in the euro zone was 2.4 % in February, according to Eurostat. A light drop, certainly, but sufficient to relaunch the debate on the next movements of the European Central Bank (ECB). Between cautious optimism and geopolitical clouds, the Euro pitch on a tightrope. Behind these percentages hide contrasting realities: energy at half mast, tenacious services and a Germany that resists. Decryption of an economic landscape in halftone.

Inflation under the magnifying glass: between disinflation and resistances

At first glance, February figures breathe relief. Overall inflation fell (2.4 % against 2.5 % in January), and the heart of the index – excluding energy and food – relaxes 2.6 %. Better still: the services, often pointed out for their inertia, display a slowdown at 3.7 %. A signal that tariff increases in the hotel industry or leisure are starting to digest post-pandemic shocks. On the market, Europe Superform Wall Street.

However, the devil hides in detail. Energy, whose prices have almost stagnated (+0.2 %), masks structural fragility. “Geopolitical tensions could overturn the table,” said Bert colijneconomist at ING.

An embargo or a transport strike, and a barrel could soar. As for food, its inflation remains tenacious above 2 %, recalling that the household basket remains under pressure.

In watermark, a question persists: is this disinflation durable? For Jack Allen-Reynolds (Capital Economics), the trend is engaged. The services, according to him, will train the heart of the index down by the end of 2024.

But the Eurozone sails in sight. Between France (0.9 % inflation in February) and Germany (2.8 %), the differences recall that the single currency remains a patchwork of economic realities.

If the statistics sketch an optimistic scenario, the ECB finds itself faced with a Cornelian dilemma: continue the rate reductions to support growth … without awakening sleeping inflation.

The ECB on the wire: How far can lower rates?

Next Thursday, the ECB is expected to announce a sixth drop in rate since June 2024. An almost routine decision, but which hides a much harsher debate. Because in Frankfurt, the governors divide: some plead for a quick descent, others fear a return of inflationary flame. “The question is no longer if we lower, but how far,” says Bert colijn.

The markets scrutinize each word of the BCE press releases, looking for indices on the “terminal rate”. A delicate balance.

On the one hand, a low euro – a possible low rate consequence – could boost exports. On the other, it could increase the cost of imports, supplying inflation. Not to mention the sword of Damocles Trumpian: customs duties on European products would have the effect of an indirect tax on local consumers.

In the background, the credibility of the ECB is also at stake. After having underestimated post-Cavid inflation, the institution intends to avoid a new fiasco. The reports of his last meeting reflect this prudence: although inflation converges around 2 %, the risks – energy, trade tensions – remain “asymmetrical”. In other words, it is better to keep a cartridge in reserve in the event of a storm.

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