In November, Eurozone inflation fell more than anticipated for the third consecutive month, putting the European Central Bank’s claim that price growth is resilient to the test. This has sparked speculation about potential rate cuts in the early spring, going against the bank’s clear guidance.
While inflation has rapidly approached the ECB’s 2% target, coming down from over 10% a year ago, policymakers are urging caution against being overly optimistic. They emphasize that the final stretch of reducing inflation might be more challenging, potentially taking twice as long to drop below 3%.
Recent concrete evidence indicating a more rapid decline in inflation than initially predicted seems to be questioning that perspective. Nevertheless, there is still a likelihood of a rebound in the upcoming months, especially as the impact of elevated energy prices from a year ago is eliminated, and certain tax cuts are reversed.
In November, the growth in consumer prices for the 20 nations using the euro currency decreased to 2.4% from October’s 2.9%, falling well below the anticipated 2.7%. This dip was influenced by a decrease in almost all items, with the noteworthy exception of unprocessed food prices.
Even the underlying factors influencing prices eased more quickly than anticipated. Inflation, excluding food and energy—closely monitored by the ECB—dropped to 3.6% from 4.2%, mainly due to a significant decrease in service prices.
This swift slowdown in inflation sets the euro zone central bank and investors on a collision course, as they seem to envision markedly different paths ahead, both for consumer prices and ECB interest rates.
“With a third month of an unequivocally positive inflation report, and prices actually decreasing from the previous month, it’s starting to seem like we’ll soon be discussing inflation being too low rather than too high,” remarked Kamil Kovar, a senior economist at Moody’s Analytics.
“If the current patterns of inflation and growth persist, 2024 could be the year when the ECB makes a significant shift in its monetary policy.”
The ECB contends that the underlying factors influencing the economy are more resistant than they seem. They predict that inflation will surpass 3% next year, only reaching the 2% target by late 2025, largely influenced by rapid nominal wage growth.
