Euro zone inflation dips in January as soft patch begins

• Headline inflation dipped to 2.4% year-over-year in January, down from 2.5% in December, meeting economists' forecasts
• Core inflation (excluding energy, food, alcohol, and tobacco) unexpectedly declined to 2.2% from 2.3%, with services sector prices continuing to ease
• The ECB expects inflation to slightly undershoot its 2% target this year and next before returning to target in 2028, with economists split on whether the next move will be a rate cut or hike

Euro Zone Inflation Dips in January as Soft Patch Begins

Key Data Points:

Euro zone inflation declined in January 2026, marking the start of an anticipated soft patch expected to persist for at least a year. Core inflation, which excludes volatile items like energy, food, alcohol, and tobacco, unexpectedly fell to 2.2% from 2.3% in December, driven by easing prices in the services sector.

Market Implications:

The European Central Bank (ECB) is expected to maintain interest rates unchanged at Thursday's meeting and throughout the remainder of 2026. The central bank projects inflation will slightly undershoot its 2% target in 2026 and 2027 before returning to target in 2028.

Inflation has stabilized around 2% over the past year following significant price increases triggered by the COVID-19 pandemic recovery and Russia's 2022 invasion of Ukraine, which elevated fuel costs.

Policy Outlook:

Economists remain divided on the ECB's next move, with rate cuts and hikes considered equally likely. Recent market volatility, partly attributed to U.S. President Donald Trump's unpredictable policies and concerns over Federal Reserve independence, has sparked speculation about potential rate cuts.

Regional Context:

The data covers the 21-country euro zone and indicates continued moderation in underlying price pressures, particularly within the services sector.

Bottom Line:

The softer inflation reading supports the ECB's wait-and-see approach, though external factors including U.S. policy uncertainty and geopolitical tensions continue to influence market sentiment. Traders should monitor Thursday's ECB decision and forward guidance for signals on future monetary policy direction.