European Services Inflation Rises, Sparking ECB Rate Hike Speculation in 2026

Eurozone private sector activity expanded for the eighth consecutive month in January, but a notable uptick in services inflation may challenge the European Central Bank’s (ECB) interest-rate strategy this year. The latest Purchasing Managers’ Index (PMI) data from Hamburg Commercial Bank (HCOB) and S&P Global showed the euro area’s composite PMI remained steady at 51.5, slightly below forecasts of 51.8. While manufacturing output continued to contract, the services sector displayed cooling signs, with its PMI dropping to 51.9 — its lowest level since September. However, the most pressing concern is the reacceleration of services inflation, which reached its highest level since April 2024. This development suggests that policymakers may feel vindicated in maintaining a cautious stance. In Germany, the private sector showed renewed momentum, with the Composite PMI rising to 52.5 in January. Conversely, France slipped back into contraction, with its Composite PMI falling to 48.6. External pressures, including potential tariffs on French exports, continue to weigh on the economy. Despite mixed economic indicators and renewed inflation fears, business confidence across the eurozone improved markedly, reaching a 20-month high. However, the outlook for the manufacturing sector remains uncertain as new orders continue to decline and export performance faces ongoing challenges.