Annual inflation in the euro zone rose for the third consecutive month to reach 2.4% in December 2024, according to preliminary data released by Eurostat on Tuesday. This figure met the expectations of economists polled by Reuters, marking an increase from a revised 2.2% in November.
Core Inflation and Services Inflation Remain Elevated
Core inflation, which excludes volatile items such as energy and food, remained steady at 2.7% for the fourth month in a row, aligning with forecasts. Meanwhile, inflation in services edged up slightly to 4%, from 3.9% in November, signaling persistent upward pressure in this segment of the economy.
Jack Allen-Reynolds, deputy chief euro zone economist at Capital Economics, commented on the figures, saying, “The high level of services inflation is partly due to temporary effects that should fade this year.” He also noted that the data is unlikely to deter the European Central Bank (ECB) from pursuing further interest rate cuts.
ECB’s Rate Cut Trajectory
The ECB has already signaled its intention to cut interest rates this year, with markets anticipating a reduction from the current 3% to 2% through multiple trims. However, the persistence of core and services inflation could lead to a slower pace of rate cuts, even as the broader economic outlook remains challenging.
“Most important for the monetary policy outlook is that core inflation was unchanged at 2.7% for the fourth consecutive month,” Allen-Reynolds added. “This won’t stop the ECB from cutting interest rates further, but the process is likely to be gradual.”
Country-Specific Data: Germany and France
Inflation trends across the euro zone’s largest economies showed mixed results. Germany’s annual inflation rate rose to 2.9% in December, surpassing expectations. In contrast, France reported inflation at 1.8%, slightly below the forecasted 1.9%.
The divergence highlights the varying economic dynamics within the euro zone, which could complicate monetary policy decisions for the ECB.
Market Reaction
The euro showed early-morning gains against the U.S. dollar following the inflation report, trading 0.33% higher at $1.0424 by mid-morning in London. However, traders remain cautious, with speculation that the euro could reach parity with the dollar later this year if the U.S. Federal Reserve adopts a more aggressive monetary policy stance than the ECB.
Haig Bathgate, director of Callanish Capital, remarked on the ECB’s approach, saying, “There’s now a lot more predictability in a lot of the data series we’re seeing. The direction of travel of rates [lower] in Europe is much more predictable than, say, the U.K.”
Broader Economic Concerns
While inflation remains elevated, the euro zone faces additional economic challenges. The region’s economy grew by 0.4% in the third quarter of 2024, but economists warn of potential headwinds in 2025, including political instability, manufacturing weakness, and the possibility of escalating trade tensions under the incoming U.S. administration of President-elect Donald Trump.
Outlook for 2025
With inflationary pressures stabilizing and growth prospects dimmed, the ECB is likely to proceed cautiously with its rate-cutting agenda. Analysts will closely monitor upcoming data to gauge the persistence of core and services inflation, as these metrics will play a critical role in shaping monetary policy decisions in the months ahead.
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