Eurozone inflation decline widens the gap with ECB forecasts

According to a report released by Capital Economics analyst Jack Allen-Reynolds, inflation in the eurozone’s service sector is expected to slow further over the coming months. It is likely to fall below the European Central Bank’s (ECB) forecasts, fueling market expectations for interest rate cuts.

Service Sector Inflation Rate Rapidly Easing

Data from Jin10 shows that the inflation rate in the service sector decreased from 3.4% in December to 3.2% in January. This pace of decline is noteworthy, indicating a near-complete reversal of the upward trend observed from August to November last year. Such a rapid shift in a short period suggests structural changes in the market, which could significantly impact future economic management.

Wage Pressure Easing as a Trigger

The slowdown in inflation is primarily driven by decelerating wage growth. As wage increase pressures in the labor market weaken, companies’ cost pressures are also easing. Furthermore, leading economic indicators point to further declines in inflation, and service sector price increases are expected to follow a downward trend.

Growing Expectations for Rate Cuts

Based on these data, there is a high likelihood that core inflation will fall below 2% in the second half of this year, with overall inflation remaining below 1.5%. This outlook is below the ECB’s official projections and opens the door for monetary easing by the central bank. Market participants are increasingly discussing the possibility of multiple rate cuts by the end of the year.