European Inflation Reading Still Worrying, Here's What Markets Need to Know!


 European zone inflation was a touch higher in January than initially estimated, Eurostat reported on Thursday, confirming that price growth is now past its peak, although underlying price pressures still show no signs of abating.

Consumer price inflation in the 20 countries that share the euro currency eased to 8.6% in January from 9.2% the previous month, reaching more than the 8.5% estimated earlier this month, when figures from Germany, the bloc's largest economy, were not included.

The data is still likely to make a less desirable reading at the European Central Bank (ECB) as a revision showed core inflation, or price growth excluding volatile food and fuel products, rose to 5.3% from 5.2%.

The ECB has raised rates by a combined 3 percentage points since July to tame inflation and policymakers are now increasingly worried that what was initially a surge driven by energy costs, is now widening to affect all sectors.

Concerns about core inflation have dominated public commentary from policymakers in recent weeks and some argue that rate hikes should not stop until there is a clear change in core price developments.

The issue is that core inflation is a better reflection of future price developments, so rates remain above the ECB's own 2% target, increasing the risk of continued overshooting.

The market is currently pricing in long-term inflation at just over 2.4% and ECB board member Isabel Schnabel has said that the market may still be underestimating inflation.

The ECB had already promised another 50 basis point interest rate hike in March and the market then saw another 75 basis point move after that, putting the highest rate in around 3.75%.