Eurozone inflation on the rise: Could ECB cuts be in jeopardy?

Inflation in the eurozone climbed to 2.4% year-on-year in December, according to preliminary data released by Eurostat on Tuesday, matching economists’ forecasts and marking an increase from 2.2% in November. 

On a monthly basis, consumer prices rose by 0.4%, reversing November’s 0.3% decline. 

Core inflation, which strips out volatile items such as food and energy, remained steady at 2.7%, in line with forecasts. While the figure aligns with expectations, it underscores the persistent challenge of bringing underlying inflation closer to the ECB’s 2% target.

Among the key components of inflation, services continued to lead with an annual rate of 4%, slightly up from 3.9% in November. 

Food, alcohol, and tobacco maintained a steady pace at 2.7%, while non-energy industrial goods eased to 0.5% from 0.6%. 

Energy prices, however, recorded a significant rebound, rising 0.1% year-on-year after falling -2% in November, reflecting higher fuel costs in some eurozone countries.

“This [inflation] figure does close to nothing in terms of altering the path for the ECB,” said Kyle Chapman, analyst at Ballinger Group. 

The expert highlighted that Frankfurt had been expecting a temporary rise for several months and is likely to overlook it for the time being.

Inflation dynamics in the eurozone

Inflation varied significantly across member states. Croatia led with a 4.5% annual harmonised rate, followed by Belgium with 4.4%. 

Other key readings included Germany at 2.8%, Greece at 2.9%, and Spain at 2.8%. In both Belgium and Germany, monthly inflation rose by 0.7%, the second-highest across member states. 

Ireland, despite having the lowest annual inflation at 1%, saw a notable monthly spike of 0.9%. 

In contrast, Italy, which recorded one of the lowest annual rates at 1.4%, registered only a 0.1% monthly rise. 

France saw its annual harmonised inflation rising from 1.7% to 1.8%, the highest since August. Spain recorded an annual inflation rate of 2.8%, the highest since July 2024. 

Netherlands’ print was 3.9%, the highest since July 2023. 

Market reactions

Financial markets appeared unfazed by the inflation data, which broadly aligned with expectations. Shorter-dated eurozone bond yields, which had risen on Monday following Germany’s surprise inflation reading, edged lower. 

ADVERTISEMENT

The two-year Schatz yield fell 3 basis points to 2.18%, while the benchmark 10-year Bund yield held steady at 2.45%.

The euro continued its upward trend, rising 0.4% to $1.0430. 

Expectations remain that the European Central Bank will cut rates by 25 basis points during its 30 January 2025 meeting, a move already priced in by markets. For the whole year, traders are expecting slightly more than 100 basis points of cumulative cuts by Frankfurt. 

European equity indices traded slightly higher

The Euro STOXX 50 and STOXX 600 rose 0.2%, while the DAX in Germany also added 0.2%. France’s CAC 40 outperformed, rising 0.4%, while Italy’s FTSE MIB lagged, slipping 0.1%.

ADVERTISEMENT

In sector movements, luxury and consumer goods outperformed, with Adidas AG climbing 2.2%, and Vincigaining 1.4%.

Conversely, banks underperformed, with the Euro STOXX Banks Index down 1.1%. Deutsche Bank declined 1.6%, while Ireland’s AIB Group and Italy’s Banco BPM fell 1.8% and 0.8%, respectively.