Eurozone inflation accelerated in November, reaching 2.3%, slightly above the 2% rate recorded in October, according to data from Eurostat. While the figure remains above the European Central Bank’s (ECB) target of 2%, it met analysts’ expectations and reflects a statistical base effect due to last year’s unusually low inflation figures.
The rise in inflation largely stems from the comparison to lower prices last year, as the Eurozone continues to recover from the pandemic’s economic impact. Despite the uptick, prices fell by 0.3% on a monthly basis, suggesting a stabilization in the cost of living. Underlying inflation, which excludes volatile energy and food prices, remained steady at 2.7%, signaling that core price pressures persist.
Price growth in services, the largest component of the consumer basket, slowed slightly to 3.9% from 4% in October. While this remains above the ECB’s preferred 3% range, services inflation is still considered a key area of concern for policymakers. In contrast, inflation in goods saw an increase, partially offsetting the slowdown in services.
Despite these inflationary pressures, the broader trend points to a gradual return to the ECB’s 2% target, bolstering the case for further interest rate cuts. The ECB’s deposit rate currently stands at 3.25%, and the primary debate among economists and policymakers is whether the ECB should opt for a smaller 25 basis point cut or a more aggressive 50 basis point reduction at its December 12 meeting.
Proponents of a smaller cut argue that high services inflation and rapid wage growth, driven by historically low unemployment, warrant a cautious approach. They contend that the ECB’s primary goal remains achieving a “soft landing” for the economy, avoiding a sharp recession while curbing inflation.
Meanwhile, those in favor of a larger rate cut argue that the eurozone economy continues to skirt recession, with weak demand and rising unemployment potentially leading to a self-reinforcing cycle of job cuts. A larger cut, they argue, would provide a more robust boost to protect jobs and stimulate economic activity.
Investor expectations are currently aligned with a 25 basis point cut in December, with only a small chance of a 50 basis point reduction. Markets anticipate further gradual rate cuts through mid-2025, with the deposit rate expected to fall to 1.75% by the end of 2025.
In related news, the ECB’s Consumer Expectations Survey showed that inflation expectations for the next 12 months edged up slightly to 2.5%, while expectations for three years out remained stable at 2.1%. However, consumers have become more pessimistic about growth prospects, with expectations for economic growth over the next year dropping to -1.1%, signaling concerns about the economic outlook.
