Eurozone inflation figures indicate a slight uptick, prompting the European Central Bank (ECB) to consider its monetary policy direction for December. As a result, in November, headline inflation ticked up from 2.1% to 2.2%. It currently stands a mere 0.2 percentage points off the ECB’s target of 2%. The increase may be temporary and analysts are projecting a continued decrease in inflation over the next few months.
Core inflation, which strips out unstable food and energy costs, has remained stuck at 2.4%. This stability is welcome indeed, as it provides a baseline to the ECB’s understanding of the wider economic picture. Food inflation held steady at 2.3%, with services inflation rising slightly from 3.4% to 3.5%. Considering that services make up the biggest share of core inflation and this rise could affect future monetary policy decisions, this is something to pay close attention to.
Additionally, businesses across the eurozone hugely expect short-term price growth to accelerate. Inflationary drivers are inflating. This provides a strong hint that the ECB would want to stay away from a very accommodative stance in its medium term orientation. The bank’s policymakers will continue to watch closely on interest rate trends. Markets were not expecting a rate cut at all until well into 2024, before this new data was released.
While it’s unfortunate to see an uptick in headline inflation, the picture going forward is more complicated. Wage growth is moderating and import prices are declining. A continued decline will contribute to inflation pressures moderating in the months ahead. Analysts hope that such factors will continue to hold inflation at bay. They don’t necessarily need to call for the ECB to act right away.
Meanwhile, the ECB is preparing for its September meeting. This third update in a row provides markets with little incentive to reconsider their expectations for the timing of future rate cuts. The central bank finds itself in a decidedly uncomfortable predicament. It needs to balance delivering an economic stimulus with continuing to address pandemic-related and new inflationary pressures.