Eurozone’s inflation rate rises to 2.3%: Should the ECB be concerned?

Eurozone inflation rose to 2.3% year-on-year in November, up from 2% in October, according to preliminary data released by Eurostat on Friday.

The figure aligns with market expectations and reflects the anticipated narrowing of the deflationary impact of energy prices.

While the annual increase marks a slight departure from the European Central Bank’s (ECB) target, the monthly data shows a more optimistic trend. Consumer prices in the eurozone fell by 0.3% in November compared to October, the steepest monthly decline since January 2024.

This drop supports hopes that disinflation is continuing, potentially paving the way for further rate cuts by the ECB.

Energy prices, a major factor in inflation dynamics, remained 1.9% lower year-on-year in November.

However, this decline was less pronounced than the 4.6% and 6.1% drops seen in October and September, respectively, as the base effect from last year’s energy price spikes fades.

On a monthly basis, energy prices rose by 0.6%. Excluding energy, the annual inflation rate held steady at 2.7%, while the core inflation measure, which excludes both energy and food prices, ticked up to 2.8% year-on-year, compared to 2.7% in October.

Monthly core inflation declined by 0.4%, suggesting that underlying price pressures may be easing. Services prices—a “sticky” inflationary component—rose 3.9% year-on-year but fell by 0.9% compared to October, offering a glimmer of hope for the inflation outlook.

Implications for the ECB: Are rate cuts in jeopardy?

The November inflation data is unlikely to alter the ECB’s current policy trajectory. The decline in monthly core inflation and services prices supports the argument that disinflationary forces remain intact.

This trend provides the ECB with further justification to lower interest rates at its December meeting, especially as economic activity weakens across the eurozone.

The latest Purchasing Managers’ Index (PMI) surveys show that the eurozone’s private sector activity contracted in November, highlighting deteriorating economic momentum.

Eurozone Composite PMI fell to 48.1 in November, down from the neutral 50.0 registered in October, signaling the sharpest contraction since January and missing market expectations for an unchanged reading.

Moreover, while the manufacturing sector remains mired in a deep slump, the services sector is no longer propping up the economy. For the first time in 10 months, the services sector slipped into contraction, with its PMI dropping to 49.2 from 51.6 in October.

“The market appears to have settled on a 25bp cut in December, particularly after Schnabel’s standout hawkish commentary wiped out the remaining bets on 50bps this week. The economy is not falling off a cliff just yet and there is uncertainty about where the neutral rate is, so there is no pressing need to start frontloading cuts,” said Kyle Chapman, forex market analyst at Ballinger Group.

Germany: Retail sales plunge

Germany, the eurozone’s largest economy, continues to face a sharp downturn in consumer spending.

Data from the Federal Statistical Office revealed that retail sales fell by 1.5% month-on-month in October 2024, following an upwardly revised 1.6% rise in September. The October decline significantly exceeded market expectations of a 0.3% drop and marked the steepest monthly contraction in two years.

The weak retail performance underscores a worsening consumer outlook in Germany, adding to concerns about broader economic fragility in the region.

Market reactions

Financial markets showed little reaction to the inflation and retail data. The euro held steady at $1.0560 against the US dollar, while eurozone sovereign bond yields remained unchanged.

Germany’s benchmark 10-year Bund yield hovered around 2.12%, its lowest level in nearly two months.

Equity markets also traded flat, with the Euro STOXX 50 index remaining unchanged after a 0.4% rise on Thursday.

Among major blue-chip stocks, Airbus SE gained 1.3%, Schneider Electric SE rose 1%, and LVMH advanced 0.6%. On the downside, Telefonica and Banco Santander fell by 1.5% and 1.2%, respectively.