Euro-Zone Jan HICP inflation decelerated to 1.1% y/y from 1.6% y/y in December. Our median was 1.4% y/y, so data were lower than expected, but the sharp decline was not a total surprise after weaker than expected German and Spanish data. The headline rate has fallen to the lowest level since July 1999, mainly on the back of positive base effects from sharply lower energy prices. Numbers will add to public pressure on the ECB to cut rates again, even though ECB policy has to be forward looking and should not react to historical data. The ECB currently expects inflation to rise again in H2 on base effects.

Meanwhile, Euro-Zone December unemployment rose to 8.0% from 7.8% in November. Expectations had been for a reading of 7.9%, but after the marked rise in German unemployment numbers the jump was not a surprise. With the German labor market catching up with the contracting economy unemployment figures are likely to rise sharply this year and the negative impact will counterbalance to a large extent the improvement in real disposable income from lower energy prices.