MARKET NEWS
Euro zone inflation eases to 2% before likely move below target in 2026 - REUTERS
FRANKFURT, Jan 7 (Reuters) - Euro zone inflation slowed as expected last month, hitting the European Central Bank's 2% target before likely moving lower in the coming months as falling energy costs offset lingering domestic price pressures, Eurostat data showed on Wednesday.
Inflation in the currency bloc slowed to 2.0% in December from 2.1% a month earlier, in line with expectation for 2.0% in a Reuters poll of economists, as energy prices continued to pull down overall price growth, offsetting a pick up in food inflation.
A more crucial figure on underlying prices, which exclude volatile food and energy costs, meanwhile eased to 2.3% from 2.4% on a modest slowdown in services and industrial goods inflation.
Price growth has hovered on either side of the ECB's 2% target for most of 2025 and the bank sees it near this level for years to come, even if most of this year and next could be spent below target.
While some policymakers have expressed concern that low readings could perpetuate anaemic inflation by deflating wage demands, most appear to have taken a relaxed view, arguing that the dip is temporary and mostly caused by energy volatility.
Indeed, the ECB last month signalled it was in no hurry to adjust policy any further, cementing market expectations that it would keep its 2% deposit rate steady through all of 2026.
Still, figures going deeply under 2% could reignite the debate over easing, but only if they raise the prospect of persistent undershooting, since monetary policy works with long lags and would do little in the near term.
In any debate, the ECB will need to reconcile a host of forces that will tug inflation in opposing directions.
Falling energy costs, a strong euro, surging Chinese imports and moderating wage demands could all pull prices lower.
But increased defence spending, Germany's fiscal splurge, a tight labour market, healthy domestic demand, and geopolitical stress could push prices up.
These forces make projections especially uncertain and will likely prevent the ECB from giving any guidance beyond the short term, suggesting that rate cuts will not be taken off the table, even if more easing cannot be ruled out.
The ECB will next meet on February 5.
