Eurozone inflation came in higher than expected in January, rising to 2.5%, but the euro weakened as fears of potential U.S. tariffs overshadowed expectations of a hawkish European Central Bank (ECB) response. European stocks declined, with auto shares hit the hardest, while bond yields fell as investors sought safe-haven assets.
According to a flash estimate from Eurostat, annual inflation in the euro area increased from 2.4% in December to 2.5% in January 2025, surpassing economist forecasts that had predicted no change. This marks the highest inflation level since July 2024.
Core inflation, which excludes energy and food prices, remained steady at 2.7%, defying expectations of a slight decline to 2.6%. Among key inflation components, services recorded the highest annual rate at 3.9%, slightly down from 4.0% in December. The cost of food, alcohol, and tobacco rose by 2.3%, slowing from 2.6% the previous month. Energy prices, however, rebounded sharply, climbing to 1.8% from just 0.1% in December, while inflation for non-energy industrial goods remained unchanged at 0.5%.
Among eurozone countries, Croatia recorded the highest annual inflation rate at 5.0%, followed by Belgium (4.4%) and Slovakia (4.1%). Meanwhile, Ireland (1.5%), Finland (1.6%), and Italy (1.7%) posted the lowest inflation rates. On a monthly basis, Slovakia and Lithuania saw the sharpest price increases, both rising by 1.6%.
Despite the stronger-than-expected inflation data, the euro struggled to gain momentum, pressured by trade policy concerns. The currency briefly found support at 1.0230 against the U.S. dollar but ended the day down 1.2%. Earlier in January, it had fallen to 1.0175, its lowest level since November 2022.
The U.S. dollar strengthened broadly, gaining 0.7% against the British pound, while the Canadian dollar weakened by more than 1% and the Mexican peso dropped 2.1% as traders reacted to escalating trade tensions.
Market volatility followed renewed threats from U.S. President Donald Trump to impose tariffs on the European Union. His administration had already implemented 25% tariffs on Canadian and Mexican goods and 10% on Chinese imports, warning that Europe could be next.
