Could Europe experience a surprising return of inflation in 2026?

Eurozone Private Sector Growth and Inflation Concerns

In January, the eurozone’s private sector continued its growth streak for the eighth consecutive month. However, a notable rise in inflation within the services sector is raising questions about the European Central Bank’s (ECB) future interest rate decisions.

Recent preliminary Purchasing Managers’ Index (PMI) data, released by Hamburg Commercial Bank (HCOB) and S&P Global, indicate that the region’s economic expansion remains fragile as the new year begins.

The composite PMI, which measures activity across both manufacturing and services, held steady at 51.5 in January—slightly below the forecast of 51.8.

Dr. Cyrus de la Rubia, chief economist at HCOB, commented, “The recovery is still quite weak.”

Although the services sector continued to grow, there were signs of a slowdown. The services PMI dropped to 51.9 in January, its lowest in four months, compared to 52.4 in December and missing the expected 52.6.

Manufacturing, on the other hand, remained in contraction for the third month in a row, with its PMI staying just below the 50-point mark.

Inflation Pressures Intensify

The most significant issue highlighted by January’s figures is the renewed acceleration of inflation in the services sector.

While overall eurozone inflation eased to 1.9% in December—slightly under the ECB’s 2% target—the latest PMI results suggest that underlying price pressures persist.

De la Rubia noted, “The ECB is closely monitoring services inflation, which has seen a marked increase in sales prices.”

Service sector selling price inflation reached its highest point since April 2024, while manufacturing output prices continued to edge down.

“These findings are far from comforting for the ECB,” de la Rubia added, implying that central bankers may feel justified in maintaining a cautious approach.

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According to de la Rubia, some of the more hawkish members of the ECB’s Governing Council might even argue for a rate increase as the next move.

The ECB’s most recent projections put inflation at 1.9% in 2026 and 1.8% in 2027.

At the ECB’s last meeting, President Christine Lagarde remarked that it was “hardly surprising” to see services inflation running higher than anticipated, contributing to the overall inflation rate.

She also pointed out that falling goods prices are helping to offset the rise in services inflation, with both components moving in opposite directions.

Business Sentiment and National Differences

Despite mixed economic signals and renewed inflation worries, business optimism across the eurozone improved significantly.

Confidence about the coming year reached its highest level in 20 months, buoyed by stronger sentiment in both manufacturing and services. Manufacturers, in particular, reported their most optimistic outlook in nearly four years.

Contrasting Trends in Germany and France

Examining the eurozone’s two largest economies reveals diverging paths.

Germany’s private sector showed renewed strength, with the Composite PMI climbing to a three-month high of 52.5 in January, up from 51.3 in December and beating expectations of 51.6.

“Overall, the data point to a positive start to the year,” said de la Rubia.

He added that both manufacturing output and new orders returned to modest growth, while the services sector experienced a more robust increase in activity.

In contrast, France’s economy slipped back into contraction. The French Composite PMI fell to 48.6 in January from a neutral 50 in December, marking the first decline since October and missing market expectations.

French businesses, especially exporters, continue to face external challenges.

Jonas Feldhusen, junior economist at HCOB, noted, “Renewed tariff threats from the US, including the possibility of a 200% duty on French champagne, highlight the ongoing vulnerability of the external environment.”

He explained that while such threats may be largely political, they add to the uncertainty for export-focused companies already dealing with a strong euro and increased competition from China.

Although the prospect of resolving the 2026 national budget brings some political stability, Feldhusen cautioned that French manufacturers still face significant hurdles.

“It remains to be seen whether the manufacturing sector will recover in 2026,” he said, pointing out that new orders are still declining and export performance remains under strain.