Eurozone inflation rises to 1.9% in February, complicating ECB rate-cut outlook

Eurozone inflation picked up in February, edging back toward the European Central Bank’s target and complicating expectations that interest rates could be cut later this year.

Annual inflation in the 20 countries that share the euro is expected to have reached 1.9% in February, up from 1.7% in January, according to a flash estimate published March 3 by Eurostat, the European Union’s statistics office. The month-on-month increase in the Harmonised Index of Consumer Prices was 0.7%.

In a brief statement, Eurostat said “euro area annual inflation is expected to be 1.9% in February 2026, up from 1.7% in January,” based on early data. Final figures are due March 31.

The reading brings inflation almost exactly in line with the ECB’s medium-term goal of 2% and closely matches the central bank’s own staff projections, which foresee an average rate of 1.9% this year. But the composition of the increase—powered by services and food while energy prices continue to fall—underscores that underlying price pressures are proving stubborn in some parts of the economy.

At the same time, the figure was higher than financial markets had anticipated. Economists polled by banks and data providers had generally forecast that inflation would hold at 1.7%. Core inflation, which excludes volatile items such as energy and unprocessed food, is estimated to have risen to about 2.4% from 2.2% in January, also above expectations.

Services and food lead the rebound

Eurostat’s breakdown shows services prices rising fastest, with an annual rate of 3.4% in February, up from 3.2% a month earlier. Food, alcohol and tobacco prices increased 2.6% from a year earlier, the same pace as in January. Prices for non-energy industrial goods—a category that includes clothing, household appliances and many manufactured items—rose 0.7%, after a 0.4% increase the previous month.

Energy remained a drag on the headline figure, with prices down 3.2% from a year earlier, compared with a 4.0% drop in January. That negative contribution, though smaller than before, reflects how far gas and electricity prices have fallen from the peaks reached during Europe’s energy crisis in 2022 and early 2023.

In its release, Eurostat noted that “services is expected to have the highest annual rate in February (3.4%), followed by food, alcohol & tobacco (2.6%), non-energy industrial goods (0.7%) and energy (-3.2%).”

Services carry the largest weight in the index—close to half of the consumption basket in many euro area countries—meaning that relatively high inflation in this sector can keep overall price growth near target even when goods prices are subdued and energy costs are dropping.

Economists and central bank officials link the resilience of services inflation to strong wage growth and tight labor markets in parts of the bloc. Labor-intensive sectors such as hospitality, personal care and some professional and health services have been slow to pass on falling energy and goods costs, leaving consumers facing price increases that outpace the headline rate.

From energy shock to services squeeze

The latest data mark a sharp contrast with the situation just a few years ago. Eurozone inflation surged to more than 10% in late 2022, driven largely by soaring energy and food prices after Russia’s full-scale invasion of Ukraine disrupted gas supplies and roiled commodity markets.

The ECB responded with its fastest-ever cycle of interest rate increases, lifting its key deposit facility rate from negative territory to 4% by mid-2024. As energy markets stabilized and global goods inflation cooled, headline inflation in the euro area fell steadily, dropping below 2% in late 2025.

Since June 2025, the ECB has reversed course, cutting its main rates in several steps. The deposit rate now stands at 2.0%, the rate on main refinancing operations at 2.15% and the marginal lending facility at 2.40%. Those levels were left unchanged at the central bank’s most recent Governing Council meeting on Feb. 5.

“The Governing Council today decided to keep the three key ECB interest rates unchanged,” the bank said in a statement then, adding that “interest rates on the deposit facility, the main refinancing operations and the marginal lending facility will remain unchanged at 2.00%, 2.15% and 2.40% respectively.”

ECB President Christine Lagarde told reporters after that decision that “our monetary policy is in good shape” and that future moves would be decided “meeting by meeting” in a world of “significant uncertainty.”

Policy dilemma deepens

The February inflation figures appear to validate the broad trajectory laid out in the ECB’s December 2025 projections, which see inflation averaging 2.1% in 2025, 1.9% in 2026, 1.8% in 2027 and 2.0% in 2028. But they also reinforce the bank’s concern that domestic price pressures are proving more persistent than earlier thought, particularly in services.

Internal ECB analysis has highlighted that services inflation remained higher than expected late last year, prompting staff to revise the 2026 inflation forecast slightly upward. Negotiated wage growth is forecast to slow from around 3.2% in 2025 to roughly 2.4% this year, but that would still be broadly in line with current core inflation, leaving little room for real wage gains.

For monetary policymakers, the return of headline inflation to just under 2% is welcome, as it suggests that the extraordinary price spikes of the energy crisis have been absorbed. However, the gap between headline and core—and the fact that the latter remains above target—complicates any case for cutting rates in the near term.

Short-term money markets had already scaled back expectations of further rapid easing before the Eurostat release, and traders moved a little further in that direction after seeing the stronger numbers. Prices in derivatives linked to future overnight rates now imply that investors expect the ECB to keep its key rates on hold for longer into 2026, and some analysts assign a small probability to the possibility of renewed tightening if inflation surprises continue.

According to traders commenting after the release, “inflation re-accelerating, especially in services, supports a tighter ECB stance” and is seen as potentially positive for the euro currency at the margin. Government bond yields across the euro area have edged higher in recent sessions, reflecting both the data and an adjustment in expectations around the path of policy.

Households still feel the pinch

For many households, the return of official inflation figures to near-normal levels has not translated into a feeling that the cost of living crisis is over.

Services inflation of 3.4% covers categories that affect daily life: rents and housing-related costs, public and private transport services, medical and care services, recreation, hospitality and personal care. Because these items are difficult to substitute or postpone, higher prices tend to be felt acutely.

Food inflation at 2.6% is far below the double-digit rates seen two years ago but remains a concern, especially for lower-income families that spend a larger share of their budget on groceries and basic goods. Surveys and online discussions across member states indicate ongoing scepticism that inflation is “really” as low as the official number, a perception gap economists often attribute to the weight of frequent, visible purchases in people’s mental calculation of inflation.

By contrast, lower energy prices are offering some relief. With energy inflation at minus 3.2%, many households are paying less for heating, electricity and fuel than they did during the peak of the gas crisis. However, energy costs remain volatile and sensitive to geopolitical developments, including tensions in the Middle East and disruptions in global shipping, leaving both consumers and policymakers wary of potential renewed spikes.

With the ECB deposit rate at 2% and headline inflation at 1.9%, short-term real interest rates are roughly flat on a headline basis and slightly negative when measured against core inflation. That means savers’ purchasing power is broadly preserved compared with last year, while borrowers face much lower nominal rates than at the peak of the tightening cycle, when policy rates were at 4%.

Technical changes and trust in the statistics

This year’s inflation readings also come against the backdrop of important technical updates to how Eurostat compiles the HICP.

As of Feb. 4, the index uses a new European classification of household consumption, ECOICOP version 2, based on an updated United Nations standard. Some items have been regrouped—for example, certain “games of chance” are now classified under recreation services—though these shifts do not significantly alter the overall inflation rate.

Eurostat has also updated the index reference year to 2025, meaning HICP values are now expressed with 2025 equal to 100. This change affects the level of the index but not the measured rate of inflation.

On March 4, the statistics office issued a small correction to the weights assigned to different components of the index, acknowledging a technical error. The largest adjustment was for services, by up to 1.4 parts per thousand. Data affected by the correction are marked as revised in Eurostat’s tables.

Statisticians stress that such updates are routine and designed to keep the price index representative of actual consumer spending. Still, they may add to public confusion about inflation figures at a time when many people feel their personal costs are rising faster than official measures suggest.

A fragile equilibrium

The euro area economy grew by 0.3% in the fourth quarter of 2025 compared with the previous three months, according to separate Eurostat data, suggesting that higher interest rates and fading inflation have not tipped the bloc into recession. Governments are now debating how quickly to rein in budget deficits under revived EU fiscal rules, while also funding priorities such as defense and climate investment.

In that context, February’s inflation number presents a mixed picture. For the ECB, it suggests the disinflation process is broadly on track, with headline inflation hovering close to the target it has spent nearly two years trying to restore. For financial markets, it is a reminder that the path back to lower interest rates may be slower and bumpier than hoped.

For households and businesses, the shift from an energy shock to a services squeeze means the face of inflation has changed even as the headline figure has fallen. Whether the current 1.9% rate proves to be a stable new normal or a pause before renewed volatility will depend less on global gas markets in the coming months and more on what happens in Europe’s wage negotiations, rental contracts and everyday service prices.