The Eurozone's harmonized CPI in December rebounded to 2.4% year-on-year, but does it hinder the European Central Bank from cutting interest rates?
This rebound is mainly driven by energy costs, with energy prices rising for the first time since July. Despite the rebound in inflation, the European Central Bank is still expected to continue cutting interest rates at the meeting on January 30
Eurozone inflation rebounded in December, with the CPI exceeding the European Central Bank's 2% target for the second consecutive month. Despite the rise in inflation, it remains at a relatively controllable level, and the ECB is still expected to continue cutting interest rates.
On the 7th, the European Union's statistical office released data showing that the Eurozone's December harmonized CPI year-on-year preliminary value was 2.4%, in line with expectations, with the previous value revised from 2.3% to 2.2%. This rebound was mainly driven by energy costs, which saw a rise in prices for the first time since July.
The month-on-month preliminary value of the harmonized CPI in December rose by 0.4%, in line with expectations, with the previous value at -0.3%.
Meanwhile, the core harmonized CPI, which excludes volatile energy, food, alcohol, and tobacco prices, had a year-on-year preliminary value of 2.7%, also in line with expectations, with the previous value at 2.7%. The growth rate of service prices slightly increased to 4%.
After the data was released, the euro against the dollar showed little short-term volatility, currently reported at 1.0423.
Despite the rebound in inflation, the European Central Bank is still expected to continue cutting interest rates
In 2024, the Eurozone's inflation rate briefly fell below 2%, mainly due to statistical effects brought about by significant fluctuations in energy costs in recent years. As these effects gradually fade, the overall inflation rate has temporarily rebounded.
Inflation in the service sector remains a concern. Due to the significant proportion of wage increases in the service sector, the inflation rate in this industry has hovered around 4% for over a year, indicating that price pressures in the service sector still exist.
However, the European Central Bank believes this situation will not persist. The growth rate of workers' wages has slowed in the third quarter, and early indicators also show that the job market is becoming weaker.
Data released the same day by the EU's statistical office showed that the Eurozone's unemployment rate remained at a historical low of 6.3% in November, unchanged for four consecutive months. A low unemployment rate indicates that the job market is still tight, which may drive wage increases and, in turn, affect inflation levels.
The Eurozone's economic growth is sluggish, particularly in Germany, the largest economy in the Eurozone, which is affected by weak manufacturing and disruptions in gas supply, raising concerns about growth prospects. According to the ECB's December forecast, the Eurozone's economic growth rate in the fourth quarter of 2024 is only expected to be 0.2%, significantly lagging behind the United States.
Despite the rebound in inflation, the market generally expects the ECB to cut interest rates at the meeting on January 30. Since June 2024, the ECB has lowered the deposit rate from 4% to 3%. However, recent inflation data from Germany and Spain exceeded expectations, leading investors to lower their expectations for a more significant rate cut.
Most officials support a "gradual" rate cut in future meetings, with each cut being 25 basis points. However, a few members of the governing council, including François Villeroy de Galhau, the Governor of the Bank of France, insist that the option for a larger rate cut must be kept on the table Despite potential fluctuations in inflation in the short term, the European Central Bank (ECB) expects inflation to continue to decline in 2025. According to the ECB's forecast, the average inflation rate in 2025 will drop to 2.1%, down from 2.4% in 2024 and significantly lower than 5.4% in 2023. Slow changes in the labor market may lead to a slowdown in wage growth, which in turn could affect the inflation rate.
ECB President Christine Lagarde stated last week that after making progress in 2024, "we hope to achieve our inflation target as expected and planned in 2025." However, uncertainties remain for the future, especially regarding the extensive trade tariff plans that Trump may implement.
Klaas Knot, President of the Dutch Central Bank, recently warned that if Trump fulfills his promises, imported goods may enter Europe at increasingly lower prices