Eurozone inflation unexpectedly rises as Trump trade war fears mount
Inflation in the euro area increased for the fourth consecutive month, pointing to the residual price pressures in the bloc ahead of a potential trade war with the US.
The headline rate of inflation picked up to 2.5 per cent in January, according to preliminary estimates from Eurostat.
This was up from 2.4 previously and ahead of most economists’ expectations.
Other metrics in the release also pointed to the stubborn inflationary dynamics still at work in the eurozone economy. Core inflation, which strips out volatile components like food and energy, remained stuck at 2.7 per cent, whereas economists had hoped to see it fall to 2.6 per cent.
Services inflation dropped to 3.9 per cent from 4.0 per cent previously, but remains well ahead of target consistent levels.
Many analysts noted that the increase over the past few months has largely been driven by base effects, which will diminish in the coming months helping to bring the headline rate lower.
“We still expect headline inflation to fall sharply in February, reaching 2.1 per cent, as base effects in energy shift,” Claus Vistesen, chief Eurozone economist at Pantheon Macroeconomics said.
And the European Central Bank (ECB) is expected to continue cutting interest rates, having reduced borrowing costs for a fifth time last week.
But the real focus on Monday morning was the threat of a global trade war, after President Trump imposed 25 per cent tariffs on goods coming from Mexico and Canada.
Europe is likely to be next in the firing line. “It will definitely happen with the European Union, I can tell you that,” Trump said. “I wouldn’t say there’s a timeline but it’s going to be pretty soon.”
An EU spokesperson said that “the EU would respond firmly to any trading partner that unfairly or arbitrarily imposes tariffs on EU goods”.
In a note published this morning, analysts at Nomura said the outlook for the European economy was “now all about tariffs”.
Analysts are divided about the exact impact of tariffs on the eurozone economy, but it is widely expected to slow growth and put up inflation.
“Retaliatory tariffs would add to inflation again as tariffs usually result in higher consumer prices,” Bert Colijn, chief economist for the Netherlands at ING said.
“With inflationary risks still prevalent and uncertainty increasing, the question is how low the ECB can push rates to give the economy more breathing room,” he added.