A man rides bicycle on a snow-covered street after snowfall in Frankfurt am Main, western Germany, on December 29, 2024.
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Annual inflation in the euro zone rose for a third straight month to reach 2.4% in December, statistics agency Eurostat said Tuesday.
The preliminary reading was in line with the forecast of economists polled by Reuters and marked an increase from a revised 2.2% print in November. Core inflation held at 2.7% for a fourth straight month, also meeting economists’ expectations, while services inflation nudged up to 4% from 3.9%.
Headline inflation was widely expected to accelerate after hitting a low of 1.7% in September, as base effects from lower energy prices fade. The full extent of increases in the reading — along with persistence in services and core inflation — will be closely watched by the European Central Bank, which markets currently expect to cut interest rates from 3% to 2% across several trims this year.
The pace of price rises in the euro zone’s largest economy, Germany, hit a higher-than-expected 2.9% in December, according to figures published separately this week. Inflation in France meanwhile came in at 1.8% last month, below a Reuters analyst poll forecasting a 1.9% print.
The euro held early-morning gains against the U.S. dollar following the print, trading 0.33% higher at $1.0424 at 10:43 a.m. in London. Traders are assessing whether the euro could decline to parity with the greenback this year, if the U.S. Federal Reserve proves significantly more hawkish than the ECB.
Haig Bathgate, director of Callanish Capital, told CNBC’s “Squawk Box Europe” that ECB policymakers would not be overly concerned by a 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 U.K.,” Bathgate said Tuesday.
While markets have frontloaded pricing for rate cuts toward the start of the year, Jack Allen-Reynolds, deputy chief euro zone economist at Capital Economics, said 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.”
“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,” Allen-Reynolds said in a note.
“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.”
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 U.S. President-elect Donald Trump have clouded the outlook for 2025.
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