Consumer prices in the eurozone increased by 2.4% year over year in December, according to Eurostat, which is in line with expectations, but above November’s reading and the European Central Bank’s 2% target. The increase was driven by energy prices, which rose for the first time since July.
Core inflation, which strips out volatile components such as fuel and food, was flat on last month, highlighting that core prices are broadly stable. “At 2.7% however, it remains significantly above the ECB’s 2% targeted level, with a tight labor market keeping the services component of inflation high,” Morningstar European market strategist Michael Field said.
“So far, the ECB’s moderately paced and methodical approach to cutting interest rates has been spot on. Comments over the holiday period from the bank suggest they believe inflation will fall again to the targeted level this year, paving the way for further rate cuts. Lower rates should be at an attractive discount relative to their US and global peers.”
In December, the greatest contributors to the annual euro area inflation rate (HICP) were services (4.0%, compared with 3.9% in November), followed by food, alcohol & tobacco (2.7%, stable compared with November), non-energy industrial goods (0.5%, compared with 0.6% in November) and energy (0.1%, compared with -2.0% in November).
The December price increase marks a return to a level last seen in July. Prices had risen by 2.2% in November and by 2% in October.
German Inflation Surprises to the Upside, French Inflation Remains Low
Ulrike Kastens, European economist at DWS, said in a research note that inflation risks are still alive, especially in Germany.
“Today’s figures are in line with the ECB’s forecast for the fourth quarter of 2024. However, the German figures also show that the underlying inflation risks should not be downplayed. This has already been reflected in slightly more skepticism in market expectations regarding the further path of interest rate cuts.”
The inflation rate in Germany rose unexpectedly sharp in December. Prices were up by 2.6%, well above market expectations of 2.4%, the Germany’s federal statistical office said on Jan. 6.
Inflation in France meanwhile remained well below the ECB’s target. Consumer prices were up by 1.8% higher in December, the French statistics authority Insee said on Jan 7. This was in line with market expectations.
The ECB lowered its inflation outlook in its December meeting to 2.1% for 2025, down from 2.3% in the bank’s September forecast, aligning closely with its medium-term 2% target. For core inflation, ECB staff project an average of 2.3% in 2025 and 1.9% in both 2026 and 2027.
What Will the ECB Do on Jan. 30?
The ECB’s first meeting of the new year on Jan. 30 is widely expected to bring another rate cut, continuing the bank’s gradual easing cycle. In December, the ECB reduced its key deposit facility rate by 0.25 percentage points to 3.00%, signaling a cautious approach to monetary policy.
Some analysts believe the deposit rate could fall as low as 1.50% by late 2025, while others argue that the ECB might stop closer to 2%, balancing the need to support growth against the risk of reigniting inflation. In the UK, the “terminal” interest rate is expected to settle around 3.5%.
“The weak economy is increasingly causing headaches for some central bankers,” Kastens added. In addition, the leading indicators show that companies are finding it increasingly difficult to implement price increases due to weak demand.
“We therefore expect the inflation rate in 2025 to settle around the central bank’s target of 2%. We continue to expect a 25 basis point cut in the deposit rate in January,” DWS forecasts.
Eurozone Inflation Could Keep Rising, Against ECB Optimism
According to ING, the ECB will remain on a cautious path. The downward impact of energy prices is now petering out and services inflation remains a concern, Peter Vanden Houte, chief economist for the eurozone at ING, said.
“All of this indicates a high likelihood that the eurozone inflation rate will increase further in the first quarter of this year. The ECB is predicting a decline in headline inflation to 2.3% in the first quarter, with negative energy inflation as a key driver. However, given current trends, this seems optimistic,” he said.
“While the central bank might argue that the current inflation increase is temporary, the hawks in the Governing Council are now less willing to ‘look through’ a supply-side-driven inflation shock than they were a few years ago.
“We still expect the ECB to continue cutting interest rates, but it is unlikely that the pace of loosening will accelerate. Those claiming that the ECB is ‘behind the curve’ may therefore be further disappointed.”
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
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