Eurozone inflation rose to 2.3% in November, according to Eurostat data released Friday, and came in as economists had expected. That was above the 2% recorded in October and pushed inflation back above the 2% target the European Central Bank set. The uptick was mostly due to volatility in energy markets, where price growth in the bloc accelerated for the second consecutive month since it bottomed at 1.7% in September. Analysts had estimated the 2.3% annual inflation rate during November, which indicates a reversal of the fading away of deflationary forces from energy prices.
Core inflation, which excluded volatile items such as energy, food, alcohol, and tobacco, was flat at 2.7% for the third successive month. This steady rate is mainly due to continued high inflation in services, which slightly eased to 3.9% in November from 4% in October.
Financial markets have priced in the inflation data mainly. They expect a 25-basis-point interest cut by the ECB in December-a fourth cut of the year. Speculation over an even larger 50 basis point cut that emerged at times in the preceding months has eased with modest economic growth improvements in the area and a slight rebounding of inflation.
A latest set of economic projections of the central bank will impact the monetary policy decision ECB is set to make when it meets on December 12. ECB officials such as Isabel Schnabel from the executive board have expressed caution regarding the easing of monetary policy, indicating the ECB’s cautious approach at not going too fast following inflation data. Besides that, the global economic environment will be also considered, more specifically in terms of US trade policy under President Donald Trump that may influence exports to Europe.
Despite the recent inflation rise, analysts say that inflation will return to the ECB’s 2% target next year. According to Kyle Chapman, an FX market analyst at Ballinger Group, the recent inflation increase was mainly because of annual energy price fluctuations, and the eurozone economy’s growth is expected to remain subdued. In any case, Pantheon Macroeconomics Melanie Debono believes that combining low unemployment and increasing wages will prevent the ECB from initiating a 50-bps cut. In this sense, an outcome is less than definite, and early 2024 is expected to be still a period of rate cuts.
