\n By Ed Frankl <\/p>\n
\n Eurozone inflation fell further below the European Central Bank’s target in January and is expected to remain under that 2% mark over the next two years. <\/p>\n
However, a weaker dollar and increased imports of lower-priced Chinese goods could push inflation even lower than policymakers expect, and persuade them to restart a series of interest-rate cuts the ECB halted in June. <\/p>\n
Inflation has hovered around the ECB’s 2% target over recent months, prompting its policymakers to reiterate that monetary policy remains in a “good place”. The central bank is expected to hold its key rate at 2% on Thursday, having maintained that level since June. <\/p>\n
Annual inflation in January was 1.7%, down from 2.0% in December, the European Union’s statistics agency Eurostat said Wednesday, its joint lowest level since April 2021. Economists polled last week by The Wall Street Journal expected a reading of 1.8%. <\/p>\n
That suggests inflation in the early part of this year could fall below the ECB’s forecasts. The bank’s economists in December said they expected inflation to average 1.9% in the first quarter of this year, down from 2.1% in the last quarter of 2025, largely due to energy-price base effects. <\/p>\n
The central bank expects inflation to drop to an average of 1.9% this year from 2.1% in 2025, and a little further in 2027, before rebounding to target in 2028. If those forecasts prove accurate, it has signaled it is unlikely to change policy this year. <\/p>\n
However, the renewed depreciation of the dollar, alongside cheaper Chinese exports into Europe, could crimp eurozone inflation further. <\/p>\n
“The ECB is expected to keep rates on hold when it meets [Thursday], but calls for a resumption in monetary easing are likely to amplify over the coming months if this trend continues,” Diego Iscaro, head of European economics at S&P Global Market Intelligence, said in a note to clients. <\/p>\n
The euro rose to a more-than four-year high against the dollar late last month, as investors fretted over President Trump’s desire to acquire Greenland and comments around the independence of the Federal Reserve. A higher euro versus the dollar reduces prices of imported goods and services, including energy, and weakens demand for eurozone exports by making them pricier overseas. <\/p>\n
ECB President Christine Lagarde will likely face questions on the impact of the dollar at her post-meeting news conference Thursday. <\/p>\n
Reflecting the stronger currency, energy prices–which are heavily influenced by international markets–fell more sharply in January than December, while services inflation also edged lower, the data showed. Non-energy industrial goods prices were down 2.4% in January from December. <\/p>\n
Imports of Chinese goods could also influence inflation data. Minutes from the ECB’s last meeting in December pointed to around 5% higher volumes of Chinese goods imports in the third quarter of 2025 compared with the prior year, combined with around 5% lower prices in euro terms for those goods. <\/p>\n
But policymakers in the 21-nation currency area–Bulgaria was the latest nation to join at the start of January–will also consider stronger economic growth figures for the final quarter of last year. That suggests demand is resilient in the eurozone, and alongside a historically low unemployment rate, could put continued upward pressure on wages. <\/p>\n
Indeed, more public investment is expected to boost the economy over the course of the year and optimism among businesses is on the rise, ING economist Bert Colijn said. <\/p>\n
“So, while inflation has dropped below 2%, medium-term inflation expectations are not softening right now,” he added. <\/p>\n
\n Write to Ed Frankl at edward.frankl@wsj.com <\/p>\n
\n (END) Dow Jones Newswires<\/p>\n
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