According to data released Friday by the region's statistics agency, annual inflation in the eurozone rose to 2.3% in November. The reading matched economists' forecasts and marked a climb back above the European Central Bank's (ECB) 2% target. In October, eurozone inflation stood at 2%, while the waning downward effect of earlier energy price declines influenced September's 1.7% figure.
Core inflation, which excludes the more volatile categories of energy, food, alcohol, and tobacco, held steady at 2.7% for a third consecutive month. Within core inflation, services remained persistently elevated, slipping only slightly from 4.0% to 3.9% in November.
Financial markets have fully priced in a 25-basis-point interest rate cut from the ECB at its meeting in December. It would mark the institution's fourth rate reduction this year if implemented. Recent improvements in the region's growth prospects and a rebound in inflation have tempered speculation that the ECB might opt for a more aggressive 50-basis-point cut.
A slightly higher-than-expected inflation reading in October, combined with cautious commentary from policymakers, has reinforced the likelihood that the central bank will limit itself to a more minor trim. The ECB's decision-making process will rely heavily on its latest internal macroeconomic projections, which it will receive just before the Dec. 12 meeting. The central bank is also expected to consider the global economic landscape, including possible policy shifts from the incoming U.S. administration and their potential impact on European exports.
Following the release of the data, the euro showed little change against the U.S. dollar and the British pound. Analysts noted that the increase in headline inflation primarily reflected the year-on-year volatility in energy prices. They also suggested that the ECB would view favorably the month-on-month easing in services inflation, which declined by 0.9 percentage points.
Despite this month's figures, the broader view in financial markets is that inflation will return to 2% sustainably next year. Although growth in the region remains soft, it is not deteriorating at a pace that would justify frontloading significant rate cuts. There is ongoing debate about the "neutral rate" level and no immediate pressure to resort to a more substantial cut at this stage.
Recent data showing record-low unemployment and higher wage growth in the third quarter are expected to deter the ECB from delivering a more aggressive 50-basis-point reduction. However, the final decision may still be closely contested internally, with some at the ECB arguing for a larger immediate cut. Should the central bank opt for the more modest 25-basis-point reduction in December, it is widely expected to follow up with similar moves in January and March to maintain momentum in its easing cycle.
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