Inflation in the euro area increased to 2.5 percent in January, a slight increase from 2.4 percent in December 2024, though still lower than 2.8 percent recorded a year ago. While this suggests a gradual moderation over the past year, the month-over-month uptick reflects ongoing price pressures.

The biggest driver of inflation remained services (1.77 pp), reinforcing concerns about persistent price stickiness in labour-intensive sectors. Meanwhile, food, alcohol & tobacco (0.45 pp) contributed significantly, highlighting sustained cost pressures on essentials. Despite earlier volatility, energy (0.18 pp) played a relatively modest role, while non-energy industrial goods (0.12 pp) added marginally.

Inflation dynamics varied across member Statesfalling in eight, stable in four, and rising in fifteenindicating uneven economic conditions across the bloc. Regionally, headline inflation rose in Spain (2.9 percent after 2.8 percent) and Italy (1.7 percent after 1.4 percent). However, it remained stable in France (1.8 percent after 1.8 percent) and Germany (2.8 percent after 2.8 percent). Inflation in Italy and France remained below the 2 percent target, while Germany and Spain continue to see inflation rise above the target.

Policymakers will likely monitor whether the upward momentum continues, particularly in services and food prices, as these could influence future monetary policy decisions within the eurozone. The latest update takes the eurozone RPI to minus 9 and the RPI-P to minus 13, meaning that economic activities are slightly behind the consensus of the eurozone economy.

No revision is the call for January Eurozone HICP at 2.5 percent for the total and 2.7 percent for narrow core, unchanged from the flash report.

The harmonised index of consumer prices (HICP) is a measure of consumer prices used to calculate inflation on a consistent basis across the European Union. Changes in the index provide an estimate of inflation, as targeted by the European Central Bank (ECB). Eurostat provides statistics for the EU and Eurozone aggregates, individual member states and for the major subsectors. Over the short-term, the central bank focusses on a number of core measures which seek to strip out the most volatile components and so give a much better guide to underlying developments. Amongst these, financial markets normally concentrate upon the narrowest gauge which excludes energy, food, alcohol and tobacco.

The measure of choice in the European Monetary Union (EMU) is the harmonized index of consumer prices which has been constructed to allow cross member state comparisons. An investor who understands how inflation influences the markets will benefit over those investors that do not understand the impact. In the European Monetary Union, where monetary policy decisions rest on the ECB's inflation target, the rate of inflation directly affects all interest rates charged to business and the consumer.

Inflation is an increase in the overall prices of goods and services. The relationship between inflation and interest rates is the key to understanding how indicators such as the CPI influence the markets - and your investments.

Inflation (along with various risks) basically explains how interest rates are set on everything from your mortgage and auto loans to Treasury bills, notes and bonds. As the rate of inflation changes and as expectations on inflation change, the markets adjust interest rates. The effect ripples across stocks, bonds, commodities, and your portfolio, often in a dramatic fashion.

By tracking inflation, whether high or low, rising or falling, investors can anticipate how different types of investments will perform. Over the long run, the bond market will rally (fall) when increases in the HICP are small (large). The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.