8th January 2025 – (Frankfurt) Eurozone inflation has reached 2.4% in December, the highest level since July, according to Eurostat. Despite this uptick, experts predict that the European Central Bank (ECB) will maintain a slow approach to rate cuts, given the region’s sluggish economic outlook.
Service prices have been the primary driver behind this inflation rise, climbing 4% year-on-year in December, up from 3.9% in November. Energy prices also showed a slight increase of 0.1%, while inflation for food, alcohol, and tobacco stabilised at 2.7%. In contrast, non-energy industrial goods inflation eased to 0.5%, down from 0.6% the previous month.
This marks the third consecutive month of increasing inflation in the eurozone, gradually rising from a low of 1.7% in September to the current 2.4%.
Among major economies, Germany’s annual inflation rose to 2.8%, up from 2.4% in November, while France saw a slight increase from 1.7% to 1.8%. Spain recorded a significant jump to 2.8%, whereas Italy’s inflation saw a minor decline from 1.5% to 1.4%.
The Organisation for Economic Co-operation and Development (OECD) forecasts a 0.8% growth in the eurozone’s GDP for 2024, with an acceleration to 1.3% in 2025 and 1.5% in 2026. Meanwhile, the ECB remains more cautious, projecting growth at 1.1% in 2025 and 1.4% in 2026.
The recent inflation increase has been attributed to base effects, with the previous year’s sharp drop in energy prices no longer influencing annual rates, as noted by consultancy Trading Economics. Peter Vanden Houte, chief economist at ING, emphasised that the downward impact of energy prices is diminishing.
With the expiration of the EU’s gas transit agreement with Russia via Ukraine, the Brussels-based think tank Bruegel estimates an annual shortfall of 140 terawatt hours for the bloc. Although liquefied natural gas imports may help alleviate this gap, the higher costs and reliability issues could further strain consumers and industries across the EU.
“This upward trend isn’t over yet. Natural gas prices are now more than 50% higher than a year ago, and oil prices are no longer declining,” Vanden Houte warned, anticipating further increases in energy prices in the first quarter. He also highlighted the potential for rising agricultural commodity prices and the threat of trade wars to push inflation higher.
Services inflation remains a significant concern, with strong wage growth and pricing power exerting upward pressure. Surveys by PMI and the European Commission indicate ongoing price increases in this sector. Vanden Houte expects inflation to continue rising into the first quarter of 2025.
Despite the upward pressure on inflation and four rate cuts by the ECB over the past year, experts believe the central bank will persist in easing rates to support the sluggish economy, albeit at a slower pace.
Michael Herzum, head of economics at Union Investment, cautioned that the recent short-term rise in inflation should not be misinterpreted. Carsten Brzeski, global head of macro at ING Research, concurred, stating that the inflation increases in December and January will not deter the ECB from making further rate cuts. “With the deposit interest rate at 3%, the current level remains overly restrictive for the fragile state of the eurozone economy,” he noted.
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