A man rides a bicycle on a snow-covered street after snowfall in Frankfurt am Main, western Germany, on December 29, 2024.
Kirill Kudryavtsev | AFP | Getty Images
Annual inflation rates in the euro zone rose for the third month in a row, reaching 2.4% in December, statistics agency Eurostat reported Tuesday.
The preliminary reading was in line with expectations of economists polled by Reuters and represented an increase from the revised reading of 2.2% in November. Core inflation held steady at 2.7% for the fourth month in a row, also in line with economists' expectations, while services inflation rose to 4% from 3.9%.
Headline inflation was widely expected to accelerate after hitting a low of 1.7% in September, as the base effects from lower energy prices fade. The full extent of the increases in the reading – along with the continuation of 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 cuts this year.
The pace of price rises in Germany, the euro zone's largest economy, was a higher-than-expected 2.9% in December, according to figures published separately this week. Meanwhile, inflation in France was 1.8% last month, below a Reuters poll's forecast of 1.9%.
the euro It maintained early morning gains against the US dollar after the print, trading 0.33% higher at $1.0424 at 10:43 a.m. in London. Traders are evaluating whether the euro may fall to parity with the US currency this year, if the US Federal Reserve proves to be more hawkish than the European Central Bank.
ECB policymakers wouldn't be too concerned about a hotter monthly inflation reading, as long as it is broadly in line with expectations, Hague Bathgate, director of Callanish Capital, told CNBC's “Squawk Box Europe.”
“There is now a lot more predictability in a lot of the data series that we're seeing… the direction of the movement of (lower) interest rates in Europe is much more predictable than in the UK, for example,” Bathgate said on Tuesday.
While markets priced in interest rate cuts at the start of the year, Jack Allen Reynolds, deputy chief eurozone economist at Capital Economics, said the stabilization of services inflation meant the ECB was “likely to continue cutting interest rates even if slowly.” “. “The economic outlook remains poor.”
“More important for the monetary policy outlook is that core inflation was unchanged at 2.7% for the fourth month in a row… This will not prevent 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. At the same time, the labor market has slowed, wage growth has slowed and the growth outlook is weak.”
The euro zone economy grew by 0.4% in the third quarter, but economists warn that political instability, persistent manufacturing weakness and the possibility of escalating trade tensions under the incoming administration of US President-elect Donald Trump have cast a shadow over the outlook for 2025.
