Annual inflation within the eurozone has increased for the third consecutive month, reaching 2.4 percent in December, according to statistics agency Eurostat. Â
This preliminary figure aligns with the predictions of economists surveyed by Reuters and signifies a rise from a revised rate of 2.2 percent reported in November. Core inflation remained steady at 2.7 percent for the fourth month in a row, also meeting economists’ forecasts, while inflation in the services sector edged up to 4 percent from 3.9 percent.
On the other hand, energy prices saw a notable recovery, climbing 0.1 percent year-on-year after a decrease of 2 percent in November, reflecting increased fuel costs in several eurozone nations.
Anticipation of headline inflation increase
Headline inflation was broadly anticipated to pick up following a low of 1.7 percent in September, as the impact of reduced energy prices begins to diminish. The European Central Bank will be closely monitoring the extent of these increases, along with the persistence of services and core inflation, as markets expect a reduction in interest rates from 3 percent to 2 percent in several steps throughout the year.
Read more: Eurozone economy struggles as December 2024 PMI reaches 49.6
Euro retains gains against the dollar
In the wake of this report, the euro retained early-morning gains against the U.S. dollar, trading 0.33 percent higher at $1.0424 at 10:43 a.m. in London. Traders are contemplating whether the euro could fall to parity with the dollar this year, particularly if the U.S. Federal Reserve adopts a more hawkish stance than the ECB.
Economic growth and challenges ahead
The eurozone economy experienced a growth rate of 0.4 percent in the third quarter, though economists caution that political instability, ongoing weaknesses in manufacturing, and the potential for heightened trade tensions under the incoming administration of U.S. President-elect Donald Trump could obscure the outlook for 2025.
Inflation dynamics in the eurozone
Inflation rates exhibited significant variation across member states. Croatia led with an annual harmonised rate of 4.5 percent, followed closely by Belgium at 4.4 percent. Other notable figures included Germany at 2.8 percent, Greece at 2.9 percent, and Spain at 2.8 percent. In both Belgium and Germany, monthly inflation rose by 0.7 percent, the second-highest among member states. Ireland, despite recording the lowest annual inflation rate at 1 percent, experienced a substantial monthly increase of 0.9 percent.
Variation across member states
In contrast, Italy, which reported one of the lowest annual rates at 1.4 percent, recorded only a 0.1 percent monthly rise. France’s annual harmonised inflation increased from 1.7 percent to 1.8 percent, the highest level since August. Spain’s annual inflation rate reached 2.8 percent, marking the highest since July 2024, while the Netherlands saw a rate of 3.9 percent, also the highest since July 2023.
Market reactions to inflation data
Financial markets seemed largely unconcerned by the inflation data, which generally met expectations. Shorter-dated eurozone bond yields, which had risen on Monday following a surprising inflation report from Germany, eased slightly.
The euro continued its upward movement, increasing by 0.4 percent to $1.0430.
Expectations for interest rate cuts
There are prevailing expectations that the European Central Bank will reduce rates by 25 basis points in its meeting scheduled for January 30, 2025, a move already factored into market pricing. For the entire year, traders anticipate cumulative cuts exceeding 100 basis points from Frankfurt.
European equity indices show slight gains
European equity indices saw slight gains. The Euro STOXX 50 and STOXX 600 both rose by 0.2 percent, while Germany’s DAX also increased by 0.2 percent. France’s CAC 40 outperformed, climbing 0.4 percent, whereas Italy’s FTSE MIB lagged slightly, dropping 0.1 percent.Â
In terms of sector performance, luxury and consumer goods sectors showed strong results, with Adidas AG rising by 2.2 percent and Vinci gaining 1.4 percent. Moreover, banks underperformed, as reflected by a 1.1 percent decline in the Euro STOXX Banks Index. Deutsche Bank fell by 1.6 percent, while Ireland’s AIB Group and Italy’s Banco BPM experienced declines of 1.8 percent and 0.8 percent, respectively.
