Inflation in the euro area has fallen further.

As the European statistics office Eurostat in Luxembourg announced on Wednesday after an initial estimate, the inflation rate in January was 8.5 percent.

In December it was 9.2 percent.

Christian Siedenbiedel

Editor in Business.

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Core inflation, which excludes volatile energy and food prices, remained stable at 5.2 percent in January.

It is thus at its highest level since the introduction of the euro and shows that the upward trend in prices is not just affecting energy and raw materials.

The inflation rates for energy, industrial goods and services declined.

Grocery prices, on the other hand, rose even more sharply on average than in December.

"The inflation figures at the beginning of the year show it once again: the target of 2 percent is still a long way off for the ECB," commented Fritzi Köhler-Geib, KfW's chief economist, on the figures.

With this magnitude, it is ultimately irrelevant that adjustments to the weighting scheme and changes in government energy market interventions had a strong impact on price measurement in January.

"Because what is decisive for the orientation of monetary policy is how inflationary pressure develops across the economy," said the economist.

The core inflation rate is likely to remain stubbornly high in 2023.

This resulted in improved economic prospects, the tight labor market, high wage demands and a high proportion of European companies, which expected further increases in sales prices: "Even if the pace of consumer price increases will slow down significantly in the coming months due to falling contributions from energy price inflation, further interest rate hikes are due to the ECB essential to persistently high core inflation.”

At the end of last year, the rate had fallen somewhat due to numerous government interventions in energy prices in various euro countries.

It peaked at 10.6 percent in October and then fell to 10.1 percent in November and 9.2 percent in December.

Some economists had expected the rate to pick up again somewhat in January.

However, that does not seem to have come true.

One reason for the declining inflation rates last year was the somewhat lower energy prices and government aid programs for households.

In Germany, for example, the state had taken over the December discount on the gas bill for households.

The statisticians had decided to take that into account fairly broadly when calculating the December inflation rate.

This effect has now been eliminated in January.

The development in the individual euro countries was quite different.

In Latvia, for example, the rate rose to 21.6 percent.

It also increased in Spain, France and Austria.

In contrast, it fell significantly in Italy, for example, from 12.3 to 10.9 percent.  

The oil price was slightly higher again in January than at times in December.

Nevertheless, overall energy prices have not risen as feared before the winter.

It is different with food: for some, the price increase was not as strong as at times last year.

Others, such as sugar, only became significantly more expensive after a certain time lag.

On average, however, the price increase has even increased further.

Paper, on the other hand, had even become somewhat cheaper again after an extreme price increase last year - because the paper mills demanded a lower energy surcharge with the lower gas price.

No inflation rate from Germany published

There was a special feature of the inflation rate in Germany this time: the Federal Statistical Office in Wiesbaden did not announce its own inflation rate for January.

That is expected to happen in the coming week.

This was justified with software problems.

These are said to have occurred in connection with a "revision", a regular rebasing of the consumer price index.

Even the individual federal states had difficulties calculating their inflation rates.

The European statistical office Eurostat, which normally needs the value from Germany to calculate the European inflation rate, has therefore worked with an estimate for Germany, which is not to be published.

Jörg Krämer, the chief economist at Commerzbank, said he had never experienced anything like this in his long career.

He expressed no understanding that if there was an estimate for Germany that Eurostat is now working with, it would not be published.

Most economists expect the inflation rate to fall further over the course of the year.

But that does not necessarily mean that inflation will largely disappear.

Many forecasts assume that inflation will remain at 5 to 7 percent on average for the year.

How is the European Central Bank reacting?

This further development of inflation is also important for the European Central Bank: The ECB Council will meet on Thursday to decide on the future monetary policy of the central bank of the euro area.

The ECB is expected to raise interest rates again by 0.5 percentage points.

In addition, it is likely to publish details on the reduction of its multi-trillion bond holdings.

ECB President Christine Lagarde recently said quite clearly at the start of the year at Deutsche Börse that interest rates must continue to rise.

Bundesbank President Joachim Nagel made a similar statement.

However, there had also been voices from the Governing Council that sounded somewhat more reserved.

Jari Stehn, chief European economist at the investment bank Goldman Sachs, is now predicting that the ECB will raise interest rates by 0.5 percentage points in February and March – as well as a last interest rate hike of 0.25 percentage points in May.