Inflation in the Eurozone continues to be the subject of particular attention, as markets scrutinize the publication of December figures. According to FactSet estimates, consumer price inflation is expected to reach 2.4% year-on-year, compared to 2.2% in November. This progression, although moderate, raises questions about the trajectory that the European Central Bank (ECB) is preparing to take. On the one hand, some investors are betting on rapid monetary easing, convinced that inflation will gradually return towards the 2% objective set by the ECB. On the other hand, the sustainability of underlying inflation at 2.7%, fueled by the rise in prices of services and food products, encourages the central bank to be cautious. While the ECB is due to hold its first meeting of the year on January 30, the balance between support for the economy and price control promises to be particularly delicate.
Rising inflation: an ambiguous signal for the ECB
The latest inflation figures in the euro zone confirm an increase of 2.4% year-on-year in December, compared to 2.2% in November, according to FactSet estimates. Despite this moderate increase, core inflation, which excludes volatile energy and food prices, remains at 2.7%, a level well above the 2% target set by the Bank. European Central (ECB). This basic price stability, combined with the slight acceleration in overall inflation, is fueling speculation about the monetary policy that the institution will adopt at its first meeting of the year, scheduled for January 30.
Investors and economists remain divided on the implications of these figures. Michael Field, market strategist at Morningstar, believes that these results could upset optimistic forecasts of a rapid easing of monetary policy. “For the more cautious, this could cause concern, while some observers were wondering a few months ago whether the ECB had not delayed in adjusting its rates, and worse, whether we were not entering in a phase of deflation, underlines-he. He insists that as long as core inflation remains at 2.7%, the ECB may be reluctant to cut rates aggressively.
The analysis of the different inflation items provides information on the main drivers of this increase. In November 2024, services recorded the highest contribution to inflation, with an increase of +3.9 percentage points. Food products, alcohol and tobacco followed, with an increase of +2.8 points, while industrial goods excluding energy posted a more moderate increase of +0.7 points. Conversely, the energy sector had a deflationary effect (-1.9 points), which partially offset the acceleration in other categories.
These trends show that inflation remains mainly fueled by the rise in prices of services and food, two components that are often rigid and not very sensitive to short-term monetary adjustments. If this dynamic continues, the disinflation expected in 2025 could turn out to be slower than expected, which would complicate the ECB's room for maneuver.
Towards monetary easing in 2025?
Although inflation remains above the 2% target, the ECB remains on course to gradually ease its monetary policy. At its December meeting, it revised its inflation forecasts downward for 2025, bringing them back to 2.1%, compared to 2.3% in its previous estimates. This correction confirms its objective of price stability in the medium term and reinforces the hypothesis of a continued fall in rates in the coming months.
For Mark Wall, chief economist at Deutsche Bank Research, inflation could have peaked at 2.4% in December before starting to gradually fall below the 2% threshold during the first months of 2025. He estimates that the risk of inflation being too low is now more likely than an upward slide. “In reality, the risks for next year are more oriented towards inflation below 2%, rather than above,” he analyzes. This perspective reassures investors in the idea that the ECB could accelerate the lowering of its rates to support this dynamic.
The anticipation of a further reduction in key rates from January is gaining momentum, especially since the ECB has already carried out a reduction of 0.25% in December. Thus, it reduced its deposit rate to 3%. Observers differ, however, on the extent of the movement planned for this year. Some are counting on a gradual descent towards 1.50% by the end of 2025, while others estimate that the ECB could stop at around 2%, in order to avoid a premature revival of inflation.
The impact of this monetary policy on financial markets remains a major issue. A more flexible approach from the ECB could boost European stocks, which are currently trading at a significant discount to US markets. According to Goldman Sachs, inflation is expected to converge towards the 2% target by the end of the year, but price adjustments at the start of the year are a key variable to watch. Moreover, if inflation slows as expected, the ECB could have sufficient room to maneuver to accelerate the rate cut, which would thus strengthen the competitiveness of European assets against their global counterparts. Conversely, any sustainability of inflationary pressures could force the institution to delay its decisions, with direct consequences on corporate financing and market dynamics.
The coming months will be decisive for the direction of monetary policy in the euro zone. If inflation follows the anticipated trajectory and approaches the 2% objective, the ECB could accelerate the reduction of its rates, which would thus facilitate access to credit and stimulate investment. On the other hand, an unexpected rise in prices, driven by an increase in energy or tensions on supply chains, would complicate this strategy and force the institution to procrastinate. This dilemma will be closely scrutinized by the markets, as the euro zone seeks to reconcile economic growth and price stability in an uncertain context.
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