Europe Credits Sharp Inflation Drop to Rise in Chinese Imports
By Reuters | 21 Feb, 2026

The drop in inflation to 1.7% in January, below the target level, was due to increased price competition produced by the 27% increase in Chinese imports during the past year, according to the European Central Bank.

Risks to euro zone inflation are "significant" in either direction, a top European Central Bank policymaker warned on Saturday, adding that the impact on prices of cheap Chinese imports warranted close attention.

After a sharper-than-expected slowdown in inflation in early 2026, new economic projections from ECB staff in March will provide additional elements to guide monetary policy decisions in the coming months, ECB Governing Council member Fabio Panetta said.

"Both upside and downside inflationary risks are significant," Panetta, who leads Italy's central bank, said in the text of a speech delivered at the Assiom-Forex financial conference.

"Monetary policy must keep a flexible approach, anchored to the medium-term outlook and based on a comprehensive assessment of the data and their implications for inflation and growth," he added.

Euro zone inflation fell to a 16-month low of 1.7% in January, below the ECB's 2% target, prompting some policymakers to warn price growth could slow too much.

Panetta said the inflation dip did not "significantly alter the medium-term assessment, but highlights a number of aspects to be monitored".

"The main one is the trend in imports from China," he added.

Chinese imports to the euro zone are up by 27% in volume terms since the start of 2024, with prices down by 8%, he said, adding that this was driving down the price of goods exposed to Chinese competition.

"The disinflationary impact remains limited for the time being, but is already visible – with the prices of the goods most exposed to Chinese competition decelerating faster than the rest – and could become more pronounced in the coming months." 

Further downward risks to inflation come from a possible additional strengthening of the euro or a correction in financial markets, where corporate equity and bonds may not be adequately pricing economic risks.

"On the other hand, energy markets remain exposed to geopolitical tensions," he said, with inflationary risks coming from higher commodity prices or a further fragmentation of global supply chains driving up input costs.

(Reporting by Valentina Za; Editing by Kirsten Donovan)