Eurozone inflation falls to 8.5%, but will interest rates rise on Thursday?

Inflation in Europe fell at the beginning of the year, which provided some relief to consumers, but still left them with higher prices. The cost-of-living crisis has sparked protests and is likely to force the European Central Bank to hike rates again on Thursday.

The consumer price index for the 20 countries that use the euro reached 8.5% in January compared to a year earlier, the European Union’s statistical office Eurostat said on Wednesday. That is lower than the annual rate of 9.2% in December.

It is the first consumer price report to include data from Croatia, which joined the eurozone on Jan. 1 but had no data available from Germany, Europe’s largest economy. Inflation in Europe has now declined for the third month in a row, from a record high of 10.6% in October.

Food and energy prices remain the main factors driving up European inflation. Food, alcohol and tobacco prices rose 14.1% year on year in January, while energy prices rose 17.2%.

The Russian war in Ukraine has shaken food and energy markets, and although commodity prices have fallen from last year’s highs, consumers are not yet seeing relief on their energy bills. Natural gas prices fell from records last summer thanks to a scramble to find supplies outside of Russia and warmer winter weather that reduced energy demand for heating. While Europe has been able to dodge fears of energy rationing and shortages after Russia cut off most of its supplies, natural gas prices are still three times what they were before Russia began assembling troops on its border with Ukraine.

The energy turmoil has made the cost of living in continental Europe and the UK more painful than in the US, prompting protests and strikes by workers in several countries seeking wages that keep pace with inflation.

Annual inflation in the US fell to 6.5% in December, while the UK reading of 10.5% indicated how the UK economy was a striking exception to the International Monetary Fund’s better outlook for 2023.

In the eurozone, core inflation, excluding volatile food and energy costs, held steady at 5.2% last month, underlining how prices are rising for both services and goods such as clothing, appliances, cars and computers.