Euro-Area Inflation Falls Below ECB Target, but Rate Cuts Remain on Hold

Euro-area inflation slipped below the European Central Bank’s target in January for the first time since the end of the pandemic-era price surge, capping a dramatic fall from double-digit levels but exposing sharp differences across the currency bloc.

Consumer prices in the 21-country euro area rose 1.7% in January from a year earlier, down from a revised 1.9% in December, the European Union’s statistics office said in a flash estimate released Feb. 4. The ECB aims to keep inflation at 2% over the medium term.

The drop, driven largely by cheaper energy, comes less than three years after inflation peaked at 10.6% in October 2022, when soaring gas and electricity bills and supply bottlenecks fueled the steepest price shock in the euro’s history.

ECB holds rates steady despite sub-target inflation

Yet policymakers in Frankfurt are not rushing to declare victory or cut borrowing costs further.

A day after the data were published, the ECB’s Governing Council left all three of its key interest rates unchanged, keeping the deposit rate at 2%. President Christine Lagarde said the central bank’s “updated assessment reconfirms that inflation should stabilise at its 2% target in the medium term.”

“Inflation fell to 1.7% in January from 2.0% in December and 2.1% in November,” Lagarde told reporters following the Feb. 5 policy meeting. “Inflation excluding energy and food eased to 2.2%.” She added that indicators of underlying price pressures “have changed little over recent months and remain consistent with our two per cent medium-term target.”

Lagarde said the ECB “cannot be hostage to one data point” and described current interest rates as being “in a good place,” signaling no urgency to move despite the sub-target reading.

Energy is dragging inflation down; services remain sticky

Behind the headline figure, the latest numbers show a changing anatomy of inflation in the euro area.

Energy prices were 4.1% lower in January than a year earlier, a much steeper decline than the 1.9% drop recorded in December. That negative contribution has become the main force pulling the overall rate down.

At the same time:

• Services prices increased 3.2% year over year, down only marginally from 3.4% in December.
• Food, alcohol and tobacco rose 2.7%, slightly faster than 2.5% a month earlier.
• Non-energy industrial goods were up 0.4%.

Services account for nearly half of the typical euro-area consumption basket, compared with roughly 9% for energy. The figures underscore why the ECB is paying close attention to wage agreements and domestic demand as it gauges how entrenched price pressures remain, even as global energy markets have stabilized.

Stripped of volatile energy and food components, the index—a commonly watched measure of core inflation—is estimated to have slowed to about 2.2% in January, its lowest reading since October 2021 but still slightly above the ECB’s goal.

Big gaps across countries complicate one-size-fits-all policy

The disinflation has not been uniform across the bloc.

France recorded the lowest annual inflation rate in the euro area in January, at 0.4%. Italy and Finland followed at 1.0%, while Belgium stood at 1.4% and Luxembourg at 1.6%. Cyprus matched the euro-area average with 1.7%.

At the other end of the spectrum, Slovakia posted the highest rate, at 4.2%, followed by Croatia at 3.6%. Inflation came in at 2.8% in both Lithuania and Greece and 2.6% in Latvia. Several other smaller and medium-sized economies, including Ireland, Spain, Malta and Slovenia, reported rates between 2.4% and 2.7%.

Among the four largest euro-area economies, Germany registered inflation of 2.1%, France 0.4%, Italy 1.0% and Spain 2.5%.

The wide range—from close to zero in France to more than 4% in Slovakia—highlights the challenge of setting a single policy rate for 21 economies at different points in the disinflation process. In lower-inflation members, such as France and Italy, borrowing costs that were set to tame a past price spike now look comparatively restrictive. In higher-inflation countries, households and businesses still face ongoing cost-of-living pressures.

Growth is modest as markets bet on a slow path for further easing

The euro area expanded modestly at the end of last year. Gross domestic product grew around 0.3% in the fourth quarter of 2025, with the ECB and other institutions expecting growth of roughly 1.2% to 1.3% in 2026. Services, investment in digital technologies and increased spending on defense and infrastructure have provided support, even as higher rates have weighed on construction and credit demand.

The ECB began lifting rates from negative territory in mid-2022, taking its deposit rate from minus 0.5% to 4% by late 2023 in response to the inflation spike. It then reversed course from mid-2024, cutting the rate in several steps back to 2% by the end of last year.

ECB staff projections updated in December foresee headline inflation averaging 1.9% in 2026 and 1.8% in 2027 before returning to 2% in 2028. Core inflation excluding energy and food is projected to average 2.2% this year and 1.9% next year, then converge toward the 2% target.

The January reading of 1.7% is slightly below that forecast path but not by a wide margin. Money market pricing suggests investors see limited chances of another rate cut in the near term, with some analysts estimating only a modest probability of a move by early autumn.

Household impact and technical changes to the index

While lower inflation eases pressure on household budgets, the adjustment has not been painless. Research by ECB economists and others has found that the sharp rate increases in 2022 and 2023 tended to hit lower-income households harder, in part because they are more likely to have variable-rate mortgages and to spend a larger share of their income on essentials such as energy and food. For many workers, however, wage growth that now outpaces price increases is beginning to restore purchasing power eroded during the inflation surge.

The latest inflation release also comes against a backdrop of technical changes. Starting with the January data, Eurostat is using an updated classification of consumption goods and services, known as COICOP 2018, and a new index reference year of 2025 = 100. The statistics office has added “games of chance” to the basket and issued a minor correction to some January figures after identifying a processing error. The revisions, of up to 0.2 percentage point for some annual rates, do not alter the overall picture of easing price pressures.

Bulgaria joins the euro as focus shifts to what comes next

The euro area’s membership has expanded as well. Bulgaria adopted the common currency on Jan. 1, becoming the 21st member of the bloc. Its annual inflation rate in January stood at 2.3%, above the euro-area average but below the highest outliers. Lagarde has described Bulgaria’s accession as evidence of “the attractiveness of the single currency and the enduring benefits of European integration,” while also urging member states to advance banking union, deepen capital markets and implement agreed fiscal rules.

With inflation now back below the ECB’s target, attention is likely to shift toward whether the current policy stance remains appropriate if price growth stays subdued and growth disappoints, particularly in countries at the lower end of the inflation range. For now, the central bank is signaling that it sees the recent data as confirmation that its strategy is working, rather than a trigger for a new round of easing.

The latest figures mark a turning point from the crisis atmosphere of late 2022, when fears of runaway prices and energy shortages dominated the economic debate. But they also underline how uneven the adjustment has been across the euro area—and how the task of maintaining price stability in a diverse monetary union does not end when a single average number falls below 2%.