Euro area CPI surprises sharply to the upside in January

The cost of living in the Eurozone nudged higher unexpectedly at the start of 2020 as energy and unprocessed food prices jumped sharply.

According to Eurostat, in seasonally adjusted terms, the year-on-year rate of consumer price inflation picked up from 5.0% in December to 5.1% for January.

Economists had penciled-in a rate of CPI increase of 4.3%.

At the core level meanwhile, CPI printed at an annual rate of 2.3%, down from 2.6% in December and versus expectations for a reading of 1.9%.

Services prices were flat on the month and those for non-energy industrial goods fell back by 2.0%.

However, energy prices surged by 6.0%, alongside a 1.7% jump in those for unprocessed food.

Commenting on the latest CPI numbers, Claus Vistesen, chief economist at Pantheon Macroeconomics, said inflation was "too hot for comfort" and noted that energy alone was not the sole driver of Wednesday's upside surprise.

Yet he also expressed "surprise" at the increase in energy inflation and pointed out the increase in the weight of the energy component within CPI as part of the 2022 adjustment, from 9.5% during the year before to 10.9%.

Nonetheless, he now feared that the core CPI reading for January might well mark the low for 2022.

"As such, the main challenge for the ECB and markets is that risks are tilted towards headline inflation above target for a considerable period, and a sharp and sustained rebound in core inflation in Q2 and Q3. This is only partially reflected in the central bank’s December forecasts, and less so after today’s data, which assume stabilisation in inflation at just under 2% through 2023 and 2024," he went on to add.

"Put simply, the governing council is now out of wriggle room. If the bank’s inflation forecasts have to rise further in March or June–and risks are tilted towards that—they will effectively hit 2%, opening the door for a more rapid removal of stimulus than currently pencilled-in, not to mention outright tightening."