Eurozone HICP Preview: Forecasts from five major banks, inflation continues to fall

At first glance, February's consumer price data should be grist to the mill for the doves on the ECB's Governing Council. After all, the inflation rate is expected to have fallen from 2.8% to 2.7%. In particular, the decline in the inflation rate excluding volatile energy and food prices from 3.3% to 3.0% should fuel speculation of an imminent rate cut. 

We look for Euro Area inflation to continue to trek lower in February, with the headline rate likely falling to 2.6% YoY and core dropping to a 24-month low of 2.9% YoY. Developments in core dynamics should be constructive; we expect core goods inflation to fall to 1.5%  YoY – its lowest rate since July 2021 – and a continued softening in services momentum will probably bring the YoY rate down to a 20-month low of 3.6%. Energy provides some upside pressure on the print, in part due to base effects in the natural gas component, but also due to the roughly 9% MoM increase in French electricity prices, as the government facilitates a gradual end to the tariff shield that protected households from the spike in prices in previous years. Petrol prices also increased roughly 2.5% MoM in February, on the back of the move higher in wholesale oil prices.

We expect both the headline and core inflation prints to ease by 0.3pp in January to 2.5% and 3%, respectively, with some downside risk. However, our core forecast sits at the edge of 2.9%, so there is a risk of a weaker reading.

The Euro Area flash February HICP print on Friday is clearly a potentially pivotal data point. We expect headline HICP is likely to fall further towards target (to 2.5%), although we warn that core HICP may print with an above-average 0.3% MoM (SA).

February inflation figures could be influential as to whether the ECB lowers interest rates as early as April or takes a more patient approach by waiting until its June meeting. The February CPI is expected to deliver more good inflation news, with base effects likely to see headline inflation slow further to 2.5%YoY, while core inflation is also forecast to slow to 2.9%. There will also be interest surrounding whether services inflation slows from its current 4.0% pace. Should Eurozone CPI inflation decelerate as forecast, or even deliver a downside surprise, it would keep the possibility of an April rate cut alive. However, an upside surprise that sees an interruption to the disinflation trend would be supportive of some of the more hawkish ECB policymakers' views and would potentially take the chance of an April rate cut off the table.