Annual euro zone inflation increased to 2.3% in November, surpassing the European Central Bank’s 2% target, as reported by statistics agency Eurostat on Friday. Economists surveyed by Reuters had anticipated the 2.3% annual rate for the month, up from 2% in October.
Price hikes in the region have risen for two consecutive months after falling to 1.7% in September, in line with expectations due to the diminishing deflationary impact from energy prices. Core inflation, which excludes volatile energy, food, alcohol, and tobacco prices, remained steady at 2.7% for the third consecutive month in November.
The core rate is supported by the resilience of services inflation, which only slightly decreased to 3.9% in November from 4% in the previous month. Market expectations include a 25-basis-point interest rate cut from the ECB in December, marking the fourth reduction by the institution this year.
Speculation about a larger 50-basis-point cut has waned since last month, following slight improvements in the euro area’s weak growth outlook and a rebound in inflation. Inflation slightly exceeded forecasts in October, while ECB policymakers, such as executive board member Isabel Schnabel, have emphasized the importance of prudence in monetary easing.
The ECB’s decision will be influenced by the latest staff macroeconomic projections it will receive just before its upcoming meeting on December 12. The central bank will also consider the potential global implications of Donald Trump’s recent election as U.S. president, including the impact of his threats of universal trade tariffs on EU exports.
The euro showed minimal movement against the U.S. dollar and British pound after the data release. Kyle Chapman, FX market analyst at Ballinger Group, noted in an email that the rise in headline inflation was primarily due to year-on-year energy price volatility. He mentioned that the ECB would view favorably a 0.9 percentage point decline in month-on-month services inflation.
Chapman stated that despite the soft growth outlook, inflation is expected to stabilize at 2% next year. He indicated that the market seemed to have settled on a 25-basis-point adjustment in December. Melanie Debono, senior Europe economist at Pantheon Macroeconomics, suggested that the inflation data, combined with recent indicators of record low unemployment and increased negotiated wage growth in the third quarter, would deter a 50-basis-point cut.
The final monetary policy decision is expected to be a close call, with more dovish ECB members advocating strongly for a 50-basis-point reduction. If the central bank opts for a 25-basis-point move, it is likely to follow with similar cuts at its subsequent meetings in January and March.
