Eurozone inflation dips back down to give European Central Bank further cause to pause

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Food prices growth slowed across the Eurozone (Source: Getty)

Inflation in the Eurozone fell back in February as growth in the cost of services fell back in a development which will confirm European Central Bank (ECB) bosses' hesitance to signal a tightening of policy.

Prices grew by 1.2 per cent over the year to February, down from 1.3 per cent in the previous month, according to the European Commission's statistics office, in line with economists' expectations.

A marked slowdown in the pace of growth of food, alcohol and tobacco prices – from 1.9 per cent to 1.1 per cent – was the main drag on the headline index. Energy price growth moderated slightly, albeit still acting as the biggest upward push on the index.

Read more: Broad-based growth in Eurozone confirmed after boom year

However, core inflation, which strips out the more volatile components from the index, rose slightly, to one per cent, giving some indication that price growth may continue its slow march towards the ECB's two per cent target.

The ECB's governing council will meet next week to update its monetary policy, but economists do not expect any major changes in tone with the central bank keen to avoid a tightening of financial conditions, even in the context of a strong economy.

However, Jack Allen, a European economist at Capital Economics, said the slower inflation reading will not prevent the ECB from changing its forward guidance on policy.

Read more: Eurozone inflation falls as energy price rises slow

He said: "February’s decline in headline inflation does not change our view that the ECB will drop the easing bias from its forward guidance. But with core inflation still weak and likely to rise only slowly, we think that interest rate hikes are a long way off."

However, consistent readings above one per cent will give ECB president Mario Draghi enough room to scale back the asset purchase programme of bond buying, known as quantitative easing, after its current September timetable, according to Alex Lydall, head of dealing at Foenix Partners.

He said: "Small steps higher for inflation will allow Draghi to consolidate his plan to curtail quantitative easing effectively and push the bloc state out of the red and into recovery mode."

Read more: Eurozone growth strongest in a decade in 2017

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