Eurozone Inflation Picks Up to ECB Target

• Euro zone inflation edged up last month to the European Central Bank's 2% target from 1.9% a month earlier, driven primarily by services inflation, while softer prices in energy and industrial goods helped moderate the overall increase.
• Before last month’s increase from the 1.9% low, inflation fell from as high as 2.5% in January 2025. Anticipating this fall, the ECB has lowered interest rates from record highs by two full percentage points over the last year, and debate has turned to whether it needs to ease policy further to prevent inflation from becoming too low, given weak growth.
• Last month, services inflation edged up to 3.3% from 3.2%, as prices rose 0.7% the month, supporting the argument of policy hawks that domestic inflation remains uncomfortably high, reducing the risk of undershooting.
• The development in services costs, which have been stubbornly high for years, is pivotal as it has raised fears that domestic inflation could get stuck above 2.0%.
• Financial investors expect one more ECB rate cut to 1.75% towards the end of the year, then anticipate a period of steady rates before possible increases towards the end of 2026.
• Core inflation, a closely watched measure that excludes volatile food and fuel prices, meanwhile, held steady at 2.3%, in line with expectations.
• The outlook, however, is complicated by the fact that it depends on the outcome of a trade dispute between the EU and the U.S. President Donald Trump's administration. For now, the conflict has reduced price pressures because it has sapped economic confidence, pushing up the value of the euro and lowering energy prices.

(Source: Reuters)