The Inflation of the Services Sector in the Eurozone Moves Away from the ECB's Targets

The latest data reveal a significant shift in the inflation dynamics of the Eurozone. The service sector, which for months was one of the main drivers of upward pressure on prices, now shows clear signs of deceleration. This reversal in trend has important implications for the European Central Bank’s monetary policy and market expectations regarding future interest rate cuts.

Consistent Price Decline in the Eurozone

Recent inflation data paint a different picture from just a few months ago. The inflation rate in the Eurozone’s services sector dropped from 3.4% in December to 3.2% in January, marking a nearly complete turnaround from the upward trend maintained between August and November 2024. This change in direction is significant: it indicates that the inflationary pressures that characterized the sector are losing strength.

According to analysis from Capital Economics, these movements reflect broader dynamics in the Eurozone economy. Wage growth, which had been a major inflation driver, now shows signs of slowing down. When workers receive more moderate wage increases, pressure on prices typically eases, especially in labor-intensive sectors like services.

Why Is Inflationary Pressure Declining?

Beyond the numbers, structural factors are at play. Leading economic activity indicators in the Eurozone suggest a slower growth pace, which generally reduces inflation expectations. When economic demand moderates, companies have less capacity to pass on cost increases to consumers, thereby containing price rises.

Jack Allen-Reynolds, an analyst at Capital Economics, highlights that this downward trend is likely to continue gaining ground. Wage deceleration and the weakening of other indicators suggest that the Eurozone is entering a phase where inflation will become less of a concern for policymakers.

Outlook for the Second Half of the Year in the Eurozone

Projections for the remainder of the year are even more significant. It is estimated that core inflation will fall below 2% in the second half of 2026, while overall inflation could drop to levels near 1.5%. These figures are particularly notable because they are well below what the ECB anticipated in its latest official projections.

This gap between the central bank’s expectations and the emerging economic reality is fueling speculation about future changes in interest rate policy. Many analysts expect that by the end of this year, the ECB will need to reconsider its stance and proceed with reductions in reference rates. For the Eurozone, this could translate into more favorable credit conditions for businesses and consumers, although it would also reflect the weakening of inflationary pressures that have characterized recent years.