Annual inflation in the eurozone rose for a third straight month to 2.4% in December, statistics agency Eurostat reported on Tuesday.
The initial reading was in line with economists polled by Reuters and was up from a revised 2.2% in November. Core inflation held steady at 2.7% for a fourth straight month, also meeting economists’ expectations, while services inflation edged up to 4% from 3.9%.
Headline inflation is expected to pick up after hitting a low of 1.7% in September, as the underlying impact of low energy prices fades. The rise, along with the resilience of services and core inflation, will be a focus for the European Central Bank (ECB), which is now widely expected to cut interest rates from 3% to 2% in several steps this year.
The rate of inflation in the eurozone’s largest economy, Germany, came in at a stronger-than-expected 2.9% in December, according to figures published separately this week. Meanwhile, inflation in France came in at 1.8% last month, below a Reuters forecast of 1.9%.
The euro continued to gain against the dollar after the report, trading up 0.33% at $1.0424. Traders are now weighing whether the euro could weaken against the greenback this year, should the US Federal Reserve take a more dovish stance than the ECB.
While markets had priced in a rate cut earlier in the year, Jack Allen-Reynolds, deputy chief Eurozone economist at Capital Economics, said the strength in services inflation meant the ECB “is likely to continue to cut interest rates gradually even as the economic outlook remains weak.”
“Most important for the monetary policy outlook is that core inflation remained unchanged at 2.7% for the fourth consecutive month. This will not stop the ECB from cutting interest rates further,” Allen-Reynolds said in a note.
“The high level of services inflation is partly due to temporary effects that are expected to subside this year. Meanwhile, the labor market has loosened, wage growth has slowed, and the growth outlook remains weak.”
The Eurozone economy grew by 0.4% in the third quarter, but economists warned that political instability, continued weakness in the manufacturing sector, and the potential for escalating trade tensions under the administration of US President-elect Donald Trump have cast a shadow over the outlook for 2025.
