Eurozone: Rise in Inflation Requires Cautious Action by the ECB

Inflation in the euro area increased again in December, which puts pressure on the European Central Bank (ECB) to act cautiously with further interest rate cuts in light of rising energy prices. Consumer prices climbed to 2.4 percent last month, exactly as predicted by experts at Bloomberg and FactSet, from 2.2 percent in November. Meanwhile, core inflation, which excludes volatile prices for energy, food, alcohol, and tobacco and is therefore an important indicator for the ECB, remained stable at 2.7 percent. The next monetary policy meeting of the ECB on January 30 is eagerly awaited, as a further interest rate cut is being considered. However, given the continued price pressure, the central bank should act cautiously. The increase in December follows a three-year low in inflation of 1.7 percent in September. Since then, consumer prices have been slowly moving back above the two percent mark, which is the ECB's target. The main driver for the recent increase was a rise in energy prices by 0.1 percent in December, after they had fallen by two percent in November. Food prices, however, remained constant at 2.7 percent. The inflation rate in the services sector also rose slightly last month from 3.9 to 4 percent. Experts see this as a reason that the ECB could only slowly continue to cut interest rates, despite the still weak economic outlook. "The persistent stubbornness of services inflation in the eurozone means that the ECB is likely to continue cutting rates only slowly, even as the economic situation remains poor," explained Jack Allen-Reynolds, deputy chief economist for the eurozone at Capital Economics. - 'Hopefully close to target' - The eurozone has managed to significantly reduce inflation from the peak levels of over ten percent at the end of 2022, following the Russian invasion of Ukraine. Due to weak economic growth, the ECB focused on lowering interest rates last year to counteract signs of economic weakness in Europe. In December, the ECB lowered its key interest rate by a quarter point to three percent, the third consecutive cut and the fourth overall since the start of its current easing cycle in June. ECB President Christine Lagarde reaffirmed in a New Year's message that the bank remains committed to further curbing inflation this year. "We have made significant progress in 2024 to reduce inflation, and hopefully 2025 will be the year we reach the target as expected and planned within our strategy," Lagarde said in a video on the social media platform X on January 1. "Of course, we will continue our efforts to ensure that inflation sustainably stabilizes at the two percent medium-term target," she added.