Consumer prices in the eurozone increased by 2.3% year on year in November, according to Eurostat, slightly below expectations but above October’s reading and European Central Bank’s 2% target.
It marks a return above this level for the first time since August. Prices had risen by 2% in October and by 1.7% in September. Core inflation, which shows prices without energy and food costs, rose by 2.7% year on year, in line with the previous month.
“For the bears out there this may cause some consternation, with commentators wondering just two months ago whether the European Central Bank has been too slow in cutting rates, and worse, whether we were entering a deflationary environment,” said Michael Field, European market strategist at Morningstar.
“Core inflation is highlighting that core prices are broadly stable. Much of the increase was around services inflation, particularly wage rates. For almost two years however, wage growth lagged inflation, so it is to be expected that there is some catch-up effect still playing out.”
In November 2024, the greatest contributors to the annual euro area inflation rate (HICP) were services (+3.9 percentage points, pp), followed by food, alcohol & tobacco (+2.8pp), non-energy industrial goods (+0.7pp) and energy (-1.9% pp).
“Some upward pressure on prices is likely to remain in December, but weak eurozone demand will be a key driver for softer inflation next year”, Bert Colijn, chief economist at ING in the Netherlands, said in an online post.
“We expected November’s data to show an increase in headline inflation because of base effects, but some upward pressure from input prices is starting to become more pressing,” he added.
“Commodity prices, such as food and natural gas, have been on the rise again, which is starting to impact headline inflation, although that impact is fairly modest so far. The substantial weakening of the euro against the dollar adds to this modest upward pressure on inflation at the moment.”
Where Does Inflation Remain High?
At a country level, there is some divergence. German headline inflation came in at 2.2% year on year, up from 2.0% in October, according to preliminary estimates by the Federal Statistical Office released on Thursday. Spanish flash HICP was at 2.4% in November, 0.60 percentage points above the October reading, driven by fuel and electricity prices, according to provisional flash data from National Statistics Institute.
In Italy, according to ISTAT’s preliminary estimates, the consumer price index (NIC) was up 1.4% on an annual basis, mainly because of energy prices. That’s up from just 0.9% in October.
Germany was particularly in focus. “A rebound in German inflation was mainly the result of less favorable energy base effects, while (...) the timing of school vacation during the Fall season inserted downward pressure on headline inflation,” explained Carsten Brzeski, global head of macro for ING Research in an online post on Thursday.
“Looking ahead, the stickiness of inflation at slightly too high a level still looks set to continue as favorable energy base effects will continue petering out while wages are increasing.
However, with the current turning of the labor market, wage growth should come down more significantly than previously thought, leading to more disinflationary pressures next year. As a result, we continue to expect [German] inflation to remain within the broad range of between 2% and 2.5% in 2025,” said Brzeski.
What Will the ECB Do in December?
The next ECB monetary policy meeting will take place in Frankfurt on Dec. 12, and the debate on the expected cut in interest rates is open. Markets have fully priced in a 25 basis points cut, which should be the fourth in 2024. A greater cut of 50 basis points seems to be less likely after inflation returned above the ECB’s target.
“We believe today’s reading shouldn’t give the ECB too much pause. Provided it doesn’t rise much higher, inflation is still close enough to where it needs to be, at or around the ECB’s targeted 2% level,” said Morningstar’s Field.
“Lower interest rates should be a significant tailwind for European equities in 2025. European equities currently trade at an attractive discount relative to their US and global peers.”
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
