Annual inflation in the euro zone increased for the third consecutive month to 2.4% in December, as reported by statistics agency Eurostat on Tuesday. This preliminary reading aligned with economists’ forecasts and showed a rise from the revised 2.2% in November. Core inflation remained steady at 2.7% for the fourth month in a row, meeting expectations, while services inflation inched up to 4% from 3.9%.
Expectations were that headline inflation would pick up after reaching a low of 1.7% in September, as the impact of lower energy prices diminished. The European Central Bank will closely monitor the extent of these increases, as well as the persistence of services and core inflation. Markets anticipate the ECB to reduce interest rates from 3% to 2% through multiple cuts this year.
In December, inflation in Germany, the largest economy in the euro zone, surged to 2.8%, surpassing expectations. Meanwhile, France recorded inflation of 1.8% last month, slightly below the 1.9% predicted in a Reuters analyst poll.
Following the release of the data, the euro maintained its gains against the U.S. dollar, trading 0.33% higher at $1.0424 in London. Traders are evaluating the possibility of the euro reaching parity with the dollar this year, especially if the U.S. Federal Reserve adopts a more hawkish stance compared to the ECB.
Haig Bathgate, director of Callanish Capital, mentioned on CNBC’s “Squawk Box Europe” that ECB policymakers would not be overly worried about higher monthly inflation figures as long as they were in line with expectations. He noted that there is more predictability in the data series, making the direction of interest rates in Europe more foreseeable than in the U.K.
While markets have priced in rate cuts at the beginning of the year, Jack Allen-Reynolds, deputy chief euro zone economist at Capital Economics, highlighted that the persistence of services inflation suggests the ECB will likely reduce interest rates gradually despite a weak economic outlook. He emphasized that although core inflation remained at 2.7% for the fourth consecutive month, the ECB is expected to continue cutting interest rates.
The euro zone economy expanded by 0.4% in the third quarter, but economists caution that political uncertainties, ongoing manufacturing weaknesses, and potential trade tensions under the incoming U.S. President-elect Donald Trump’s administration could cloud the outlook for 2025.
Correction: The article has been updated to reflect that the German statistics agency Destatis revised its year-on-year harmonized inflation figure to 2.8% in December.
