Eurozone inflation was much higher than expected in January
The upside surprises to inflation in Europe continue. A month-on-month decline in January of -0.3% was forecast, but prices increased by +0.3% on the headline. This has driven a surprise increase of headline inflation to 5.1% (from 5.0%) where the consensus had been forecasting a decline to 4.4%.
Core inflation did fall back slightly from 2.6% to 2.3%, but this was again well above the +1.9% reading that had been forecast.
What does this mean?
As you can see from data from EuroStat, the overwhelming increase in energy prices is still a massive component of the headline inflation rise.
Energy prices are up +28% year on year and contributed to +6% jump in January. Stripping out the energy costs and we see that inflation for services and industrial goods is a more moderate +2.4% and +2.3% respectively.
The ECB will be looking more at these core industries to derive their outlook for inflation.
The big question concerns what this inflation number does to the ECB monetary policy decision tomorrow. The Governing Council may have given up its “transitory” position, but they have been very patient with inflation moving above the 2% basis of its inflation target.
However, with inflation from the Eurozone countries such as Germany, France, Italy, and Austria all coming in higher than expected this week, it is clear that elevated inflation pressures continue across the region.
Christine Lagarde has been adamant that inflation will ease back as the year progresses. This inflation number may not change this view, but she will certainly face some tough questions.
Initial Market Reaction
Understandably, in the wake of such a significant inflation surprise, we have seen EUR moving decisively higher. Importantly too, this move has taken EUR/USD above resistance at 1.1300.
Having been an old floor of support, 1.1270/1.1300 has been a barrier that the recovery has needed to overcome. This will be seen as a bullish signal if the market can sustain the breakout in the coming hours.
The next key resistance to overcome is at 1.1360.
