Euro zone inflation climbs to 2.4% in December, meeting expectations

Inflation in the euro zone continued its upward trend for a third consecutive month, reaching 2.4% in December, according to preliminary data released by the statistics agency Eurostat on Tuesday.

This figure aligns with forecasts from economists polled by Reuters, and marks an increase from a revised 2.2% in November.

While this rise in headline inflation was anticipated, the European Central Bank (ECB) will closely monitor the extent of these increases, particularly in relation to core and services inflation, as it deliberates on interest rate cuts.

Core inflation steady amid rising prices

Core inflation, which excludes more volatile energy and food prices, remained unchanged at 2.7% for a fourth straight month, also meeting economists’ expectations.

Services inflation, however, nudged up to 4% from 3.9%.

This persistent upward pressure on services prices is a key area of concern for the ECB, as it is often seen as more indicative of underlying inflationary trends.

ECB rate cuts still anticipated

The rise in headline inflation was widely expected, following a low of 1.7% in September, as the impact of lower energy prices from previous periods begins to wane.

Markets currently anticipate that the ECB will cut interest rates from 3% to 2% across several trims this year.

The data will provide insight into the scope and speed of these expected rate cuts, as the central bank balances its goals of price stability and economic growth.

Divergent inflation rates in key euro zone economies

The pace of price rises in Germany, the euro zone’s largest economy, reached a higher-than-expected 2.9% in December, according to figures published separately this week.

In contrast, inflation in France came in at 1.8% last month, below the 1.9% forecast in a Reuters analyst poll.

These varied inflation rates across key member states underscores the complexity of managing monetary policy for the entire euro zone.

Euro holds gains against the dollar

The euro held early-morning gains against the US dollar following the release of the inflation data, trading 0.33% higher at $1.0424 at 10:43 a.m. in London.

Traders are currently assessing whether the euro could decline to parity with the US dollar this year, particularly if the Federal Reserve adopts a significantly more hawkish stance than the ECB.

ECB unlikely to be overly concerned, experts say

Haig Bathgate, director of Callanish Capital, told CNBC’s ‘Squawk Box Europe’ that ECB policymakers would not be overly concerned by a slightly hotter monthly inflation reading, as long as it was broadly in line with expectations.

“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 UK,” Bathgate said Tuesday, suggesting a greater degree of confidence in the European trajectory.

ECB likely to proceed cautiously with rate cuts

Despite markets pricing in rate cuts early in the year, Jack Allen-Reynolds, deputy chief euro zone economist at Capital Economics, told CNBC that the stickiness of services inflation meant that the ECB was “likely to keep cutting interest rates only slowly even as the economic outlook remains poor.”

Allen-Reynolds noted that “Most important for the monetary policy outlook is that core inflation was unchanged at 2.7% for the fourth consecutive month… This won’t stop the ECB from cutting interest rates further,” adding that “The high level of services inflation is partly due to temporary effects that should fade this year. Meanwhile, the labor market has loosened, wage growth is slowing and the growth outlook is weak.”

Economic outlook clouded by uncertainty

The euro zone economy grew by 0.4% in the third quarter, but economists warn that political instability, ongoing manufacturing weakness, and the potential for escalating trade tensions under the incoming administration of US President-elect Donald Trump have clouded the outlook for 2025.

These factors add further complexity to the ECB’s task of navigating monetary policy in the months ahead.

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