Inflation ticks up ahead of brewing tariff storm

Euro Macro: Energy drives upside surprise; services cools

Flash HICP inflation surprised slightly to the upside in January, picking up to 2.5% y/y, against our and consensus expectations for a steady 2.4% reading. The surprise was driven by energy; while we don’t yet have the full breakdown, we suspect this was driven by quicker pass-through of recent natural gas price rises to household energy bills. In contrast, services inflation surprised slightly to the downside at 3.9% (we expected a steady 4% reading), but with goods inflation coming in marginally firmer (at a still low 0.5% y/y), core inflation held steady at 2.7%. This was against consensus expectations for a decline to 2.6%, but in line with our forecast. The drop in services inflation is a positive sign that the annual indexation of (for instance) insurance premiums is less than we’ve seen in recent years. It also suggests – as the ECB noted last week – that companies are absorbing part of the elevated wage growth in their margins rather than passing it on fully to consumers.

Inflation set to fall back; tariffs pose further downside risks

The recent bounce in inflation was expected, as it was driven to a large extent by base effects in energy prices. Those same base effects will go into reverse and exert downward pressure on inflation over the coming months. While the recent continued rise in natural gas and electricity prices will blunt that downward pressure, we expect headline inflation to fall to a 2-2.2% range over the remainder of Q1 and moving into Q2. For core inflation, we expect a more gradual move lower, as services price rises this year are expected to be smaller than those seen last year, and this will push services inflation below its tight 3.9-4.1% range of the past year down to a 3.6-3.8% range. And this is before we get to a potential tariff war with the US. While the ECB has described the impact on inflation as ‘uncertain’, we see the risks for inflation skewed firmly to the downside. Even assuming a like-for-like retaliation against Trump tariffs, the upward impact on eurozone inflation is likely to be small (around 0.1-0.2pp), given the low share the US has in eurozone imports (just 13%). Meanwhile, the downward impact – through the hit to growth and ultimately energy prices, and reduced pricing power of producers – is likely to be much bigger. This is expected to push eurozone inflation well below the ECB’s 2% target as we move into 2026, but potentially sooner if the tariff hit comes more imminently. We will have more to say on the brewing tariff war in a note later today.

The Netherlands: Dutch inflation takes a breather

The January flash estimate of Dutch inflation (CPI) took a notable breather, with the flash estimate declining to 3.3%, down from 4.1% in December. This decrease was largely influenced by a reduction in services inflation, which fell from 5.8% y/y in December to 4.4% in January. Some services prices, such as for example subscriptions and medical services, are usually indexed in January. This may have contributed to the easing in services inflation. Additionally, y/y energy prices declined, benefitting from favourable base effects as the energy index was notably higher in January 2024. Conversely, food inflation unexpectedly rose to 7% y/y, up from 6.7% in December, despite the anticipated impact of the base effects from increased taxes - such as the sugar tax - falling away. Looking ahead, while we anticipate a gradual decline in inflation over the coming months, it is likely to remain above the 2% target with continued strong wage growth, a tight labour market, and an expansive fiscal stance by the Dutch government.