The month of January saw inflation in the euro zone record declines for the third consecutive month, but this does not give the European Central Bank (ECB) much relief.
This is due to the fact that underlying price growth continued to be steady, which increased concerns about the reliability of the numbers.
There was a drop in inflation from 9.2% in December to 8.9% in January across the 20 countries using the euro.
On Wednesday, Eurostat data showed that this drop in inflation occurred due to a decline in energy prices, even though prices remained under pressure due to industrial goods and food.
This number was below the 9% that had been predicted by economists. There has been a rapid decline in price growth after it hit a peak in October at 10.6%.
However, the ECB has already made promises to deliver more hikes in the interest rate, as it is concerned that inflation would become entrenched above its target of 2% if borrowing costs are not high enough.
On Thursday, ECB policymakers are scheduled for a meeting and are expected to hike the interest rate by 50 basis points to take it to 2.5%.
But, the biggest question is how much more tightening will be signaled by the ECB in its meeting.
It is unlikely that concerns would be eased due to the decline in headline inflation in conservative policymakers about entrenching of rapid price growth.
These concerns were reinforced on Wednesday when underlying inflation turned out to be high. There was a rise in inflation from 6.9% to 70%, excluding volatile fuel and food prices.
Another narrower measure that the ECB monitors also continued to hold steady at 5.2%, even though forecasts had placed it at 5.1%.
Prices of industrial goods and food were the reason behind the rise in underlying inflation, but there was a slight easing in services inflation.
Analysts said that since the ECB had shifted its focus towards core inflation rather than the main measure, it was unlikely that a decline in headline inflation would change the hawkish stance of the central bank.
Therefore, they have predicted an increase in interest rate by 50 basis points this month and the next and then another 25 basis points increase in May.
The reliability of the data has also become another issue. As compared to other months, there wasn’t data from the bloc’s biggest economy i.e. Germany.
Thus, model-based estimates had to be used by Eurostat. Since the information was missing, many analysts said that it was better to assume there was a delay in the inflation print.
Moreover, economists also said that January numbers are usually very volatile because there are changes in prices at the start of the year.
Policymakers with a hawkish stance will argue that if the economic downturn is milder than expected, it would mean unemployment would see a smaller increase.
Therefore, there will be upward pressure on wages and this will drive the ECB to hike the rates higher.