Market News

By Alexander Weber

(Bloomberg) -- Euro-area inflation accelerated last month, supporting the European Central Bank’s gradual approach to reducing interest rates, without derailing them altogether. 

Consumer prices rose 2.4% from a year ago in December, up from 2.2% in November and matching the median estimate in a Bloomberg poll. The increase was largely driven by energy costs, which climbed for the first time since July, Eurostat said.

Core inflation, which strips out such volatile components, stood at 2.7%. In the services sector, price growth edged up to 4%. 

The pickup will come as no surprise to the ECB, which has repeatedly warned that the path back to its 2% target will be bumpy. It only expects to sustainably hit that milestone toward year-end. A Bloomberg Economics nowcast sees inflation holding at 2.4% in January. 

Bonds were little changed after the data. The German two-year yield, among the most sensitive to monetary policy, was one basis point lower at 2.18%, just below a two-month peak reached yesterday. Wagers on ECB rate cut expectations were also steady, with swaps pricing pointing to just over 100 basis points easing by year-end.

What Bloomberg Economics Says...

“A large part of the increase comes from fuel price base effects - there’s no evidence that domestic cost pressure is moving materially upwards. The big picture remains one of generalized disinflation which will allow the Governing Council to keep cutting this year — we expect 100 basis points of easing.”

—Jamie Rush, chief European economist. For full react, click here

National reports in recent days already showed prices rising more strongly than estimated in Germany and Spain, while they increased less than anticipated in France and unexpectedly slowed in Italy. A separate report from the ECB showed that inflation expectations of consumers increased in November.

Officials are still on track to keep lowering borrowing costs after a fourth reduction in December. At 3%, the deposit rate is still seen by most as restricting economic activity at a time when the currency bloc is failing to mount a strong recovery.

Most back “gradual” cuts at the upcoming meetings, meaning quarter-point increments. A few Governing Council members, including Bank of France Governor Francois Villeroy de Galhau, insist that the option of a bigger reduction must remain on the table, however. 

While inflation already dipped below 2% last year, the retreat was driven by statistical effects related to strong swings in energy costs over recent years. As they fade, the headline number is temporarily rebounding.

Concern about inflation in the services sector remains, however. It’s been stuck at about 4% for more than a year, largely due to rising wages, which play a greater role in that part of the economy than elsewhere.

The ECB doesn’t see this situation persisting. Workers’ pay grew at a slower pace in the third quarter, and early indicators point to a softening in the jobs market. 

The increase in energy prices might not be the last one. Russian gas is no longer being transported via Ukraine and Europe is burning through gas reserves more quickly than at any point in the last seven years as cold weather ramps up heating needs.

President Christine Lagarde said last week that after progress made in 2024, “hopefully 2025 is the year when we are on target as expected and as planned in our strategy.”

A big question mark hangs over incoming US President Donald Trump’s plan to impose wide-ranging trade tariffs. Those could jolt the euro-area economy, with the impact on inflation to be determined by factors including the exchange rate and potential counter-measures by the European Union and China.

Dutch central-bank chief Klaas Knot warned recently that if Trump makes good on his promise, Chinese goods could enter Europe “at lower and lower prices,” effectively exporting that country’s struggles with deflation.

--With assistance from Barbara Sladkowska, Joel Rinneby, Eva Brendel, Carolynn Look and Alice Gledhill.

(Updates with Nowcast in fourth paragraph, Bloomberg economics after fifth.)