Eurozone Inflation Cools, but Economic Uncertainty Lingers

The figure has made the markets tremble: inflation in the eurozone stood at 2.4% in February, according to Eurostat. A slight decrease, certainly, but enough to reignite the debate on the upcoming movements of the European Central Bank (ECB). Between cautious optimism and geopolitical clouds, the Euro wobbles on a tightrope. Behind these percentages lie contrasting realities: dwindling energy, resilient services, and a Germany that resists. Decoding a dimly lit economic landscape.

Inflation under the microscope: between disinflation and resistance

At first glance, the February figures breathe relief. Overall inflation retreats (2.4% compared to 2.5% in January), and the core index — excluding energy and food — eases to 2.6%. Better yet: services, often criticized for their inertia, show a slowdown at 3.7%. A signal that price hikes in hospitality or leisure are starting to absorb the post-pandemic shocks. In the market, Europe outperforms Wall Street.

Yet, the devil is in the details. Energy, whose prices have almost stagnated (+0.2%), hides a structural fragility. “Geopolitical tensions could turn the tables,” emphasizes Bert Colijn, an economist at ING.

An embargo, a transport strike, and the barrel would shoot up again. As for food, its inflation remains stubbornly above 2%, reminding us that the household shopping basket is under pressure.

Underlying this is a persistent question: is this disinflation sustainable? For Jack Allen-Reynolds (Capital Economics), the trend is set. Services, he believes, will pull the core index down by the end of 2024.

But the Eurozone is navigating by sight. Between France (0.9% inflation in February) and Germany (2.8%), the gaps remind us 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: to continue lowering rates to support growth… without waking up the dormant inflation.

The ECB on a tightrope: how far to lower rates?

Next Thursday, the ECB is expected to announce a sixth rate cut since June 2024. An almost routine decision, yet it conceals a much harsher debate. For in Frankfurt, the governors are divided: some advocate for a rapid descent, while others fear a return of inflationary flames. “The question is no longer if we lower, but how far,” summarizes Bert Colijn.

The markets scrutinize every word from the ECB’s statements, in search of clues about the “terminal rate.” A delicate balance.

On one hand, a weak euro — a possible consequence of low rates — could boost exports. On the other, it risks increasing the cost of imports, fueling inflation. Not to mention the Damocles sword of Trumpian policies: tariffs on European products would act as an indirect tax on local consumers.

In the background, the credibility of the ECB is also at stake. Having underestimated post-Covid inflation, the institution aims to avoid a new fiasco. The minutes from its last meeting reflect this caution: although inflation converges towards 2%, the risks — energy, trade tensions — remain “asymmetric.” In other words, it is better to keep a cartridge in reserve in case of a storm.

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