Euro Zone Inflation Rises to 2.4% in December, Meeting Expectations
The euro zone’s annual inflation rate climbed to 2.4% in December, marking the third consecutive month of growth, according to Eurostat. This preliminary reading aligns with economists’ forecasts and represents an increase from the revised 2.2% rate in November.
Core Inflation Remains Steady, Services Inflation Edges Up
Core inflation, which excludes energy and food prices, held steady at 2.7% for the fourth straight month, meeting expectations. Meanwhile, services inflation rose to 4% from 3.9% in November. The European Central Bank (ECB) will closely monitor these developments, as they weigh the potential for interest rate cuts this year.
Germany and France Show Mixed Results
Inflation in Germany, the euro zone’s largest economy, reached 2.9% in December, exceeding expectations. In contrast, France’s inflation rate came in at 1.8%, below forecasts.
Euro Holds Gains Against US Dollar
Following the inflation report, the euro maintained its early-morning gains against the US dollar, trading 0.33% higher at $1.0424. Traders are now assessing the likelihood of the euro declining to parity with the greenback this year, depending on the US Federal Reserve’s stance on interest rates.
ECB Policymakers Unfazed by Inflation Rise
According to Haig Bathgate, director of Callanish Capital, ECB policymakers are unlikely to be overly concerned by the higher-than-expected inflation reading, as long as it remains broadly in line with expectations. The direction of interest rates in Europe is seen as more predictable than in the UK.
Interest Rate Cuts Expected, but at a Slower Pace
While markets have priced in rate cuts for the start of the year, Jack Allen-Reynolds, deputy chief euro zone economist at Capital Economics, believes the ECB will cut interest rates only slowly, despite the economic outlook remaining poor. The stickiness of services inflation and the loosening labor market will influence the ECB’s decision-making process.
Euro Zone Economy Faces Challenges Ahead
The euro zone economy grew by 0.4% in the third quarter, but economists warn of potential headwinds, including political instability, manufacturing weakness, and escalating trade tensions under the incoming US administration.
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