Euro-Area Inflation Climbs to 2.3%

In the eurozone, in November the inflation figure exceeded the European Central Bank’s target of 2%, although this circumstance, as experts suggest, is unlikely to become a deterrent in the context of the implementation of the intention of the financial authorities of the region to further cut interest rates next month and later.

In the current month, consumer prices in the eurozone showed an increase of 2.3% year-on-year. It is worth noting that in October, the corresponding indicator increased by 2% compared to the figure for the same period in 2023. The November dynamic of consumer prices in the eurozone coincides with the preliminary expectations of economists who were interviewed by the media.

The acceleration of European inflation along an upward trajectory is largely due to the impact of the factor caused by energy-based effects. At the same time, in this region, price growth in the service sector remained at a high level. The appropriate information was made public by Eurostat on Friday, November 29th.

Prices of non-energy industrial goods in the eurozone have shown growth for the second month in a row.

Core inflation in the current month in the specified region was fixed at 2.7%. In this case, the indicator did not show any changes. It is worth noting that experts interviewed by the media expected that in November, core inflation in the eurozone would be higher compared to the result that was eventually recorded. It is worth noting that the mentioned indicator does not take into account volatile prices for food and energy.

At an event in S’Agaró, Spain, the European Central Bank Vice President Luis de Guindos said that the November inflation increase was expected. At the same time, he expressed caution regarding the prices of services. Luis de Guindos also said that officials of the European Central Bank are confident that inflation will continue to drop. However, he noted that the context of uncertainty is very intense.

European Central Bank officials have telegraphed a fourth quarter-point lowering of borrowing costs at their final monetary policy meeting of this year, which will take place in less than two weeks. It is worth noting that in terms of the space for action, the mentioned financial regulator is faced with what can be described as a limited scale. In this case, in a conventional sense, time reduces space. It is a kind of chronological circumstances that limit the possibility of action by the European Central Bank. December is the most appropriate period for the adoption by the mentioned financial regulator of another lowering of the cost of borrowing, since later moves within the framework of the corresponding vector of the dynamic of monetary policy may face barriers in the form of persistent inflation, which may intensify, and the Federal Reserve’s own plans for cutting interest rates after Donald Trump’s victory in the election of the President of the United States. At the same time, it should not exclude the possibility that the mentioned circumstances related to both the internal economic situation and the event context in the external space in relation to the European Union will become a reason for refusing to lower the cost of borrowing. However, the probability of the implementation of the corresponding scenario is far from high, as officials of the European Central Bank signal a confident attitude towards the continuation of monetary policy easing, which began in the summer. The June decision of this financial regulator to cut interest rates was the first such decision of this institution in the last five years. It is also worth noting that officials of the European Central Bank have not yet made statements that would unequivocally indicate that the current conjuncture of economic reality, consisting, among other things, of difficult circumstances of a pessimistic orientation in terms of prospects for further continuation of the existing situation, may cause movement along the trajectory of monetary policy easing to stop. If the present tendencies persist, it will be more difficult for this financial regulator to cut interest rates next year. At the same time, the probability of continued lowering of the cost of borrowing is not low.

The European Central Bank’s policymakers, who adhere to the so-called dovish position, are currently demonstrating concern that the region’s weakening economy may cause inflation to fall short of the 2% target. Among those who adhere to the mentioned position are Greece’s Yannis Stournaras and Portugal’s Mario Centeno. Proponents of the dovish monetary policy concept have intensified their calls to bring the deposit rate to 2%. Currently, this figure is 3.25%. According to policymakers who adhere to a dovish approach, the 2% mark is neutral, which means that it has neither a stimulating nor a restrictive effect on economic growth.

Nowadays, in the eurozone, the marginal lending rate is at 3.65%. The rate for the main refinancing operations currently is 3.4% in this region.

France’s Francois Villeroy de Galhau this week admitted the possibility that the European Central Bank may face the need to take borrowing costs into expansionary territory to promote an upward dynamic of the economy. It is worth noting that these statements are similar to the publicly declared opinion of Italy’s Fabio Panetta.

Investors are currently also concerned about the potential prospects for the further dynamic of the eurozone economic system. A key market gauge of medium-term inflation expectations dipped below 2% this week for the first time in two years.

Economists Jamie Rush and David Powell named base effects in fuel prices as the main factor in accelerating inflation in the eurozone in November. At the same time, they noted that this dynamic is unlikely to trouble the European Central Bank’s policymakers. According to them, the big picture remains one of generalized disinflation and weak economic growth. Jamie Rush and David Powell suggest that the European Central Bank will continue to ease monetary policy next year. They forecast interest rates to be cut by 100 basis points in the eurozone in 2025.

The European Central Bank’s policymakers, who adhere to the so-called hawkish position, are more cautious and warn against hasty further lowering of borrowing costs due to sticky inflation in the services sector. Also, supporters of this point of view note that in the mentioned case, speed is not the parameter to strive for, because there are circumstances such as an increase in elevated wages and huge uncertainty in the geopolitical space. Separately, it is worth noting that the geopolitical factor as a source of some kind of alarming impact has not yet shown signs of weakening or at least minimal positive change in the situation in the foreseeable future. One of the European Central Bank’s policymakers who adhere to a hawkish position is Bundesbank President Joachim Nagel.

According to the data contained in the October expectations survey of the European financial regulator, consumers in the eurozone also forecast a slight increase in inflation in a year. For them, this is economic changes at the level of personal material well-being.

European Central Bank Governing Council member Martins Kazaks said that the victory over inflation has not yet been won, but the corresponding indicator is already approaching the target. In his opinion, for the mentioned reason, interest rates have to be cut.

Joachim Nagel and Francois Villeroy de Galhau said that the European financial regulator’s inflation target is in sight. The Bundesbank President noted that the November growth of the mentioned indicator was expected.

According to data published by Eurostat, inflation in the European services sector was recorded at 3.9% in the current month. It is worth noting that in October this figure was 4%. The decrease in inflation in the mentioned sector is minimal and does not negate the fact that the corresponding figure continues to be too high for many European Central Bank policymakers.

Executive Board member of the mentioned financial institution Isabel Schnabel stated that the cost of borrowing is already close to neutral. According to her, currently, it does not seem appropriate to go lower to stimulate the economy.

The European Central Bank’s new projections on economic growth and the dynamic of prices in December will be the main factors in determining how aggressively monetary policy will be eased. Currently, some officials of the mentioned financial institution are convinced that inflation will reach the 2% mark at the beginning of next year. At the same time, the forecasts of the European Commission provide that the path to the transformation of the mentioned goal from a theoretical indicator to an objective fact of economic reality will be longer. This regulator expects inflation in the eurozone to reach 2.1% next year. The European Commission also predicts that the mentioned indicator will decrease to 1.9% in 2026. Moreover, the regulator argues that despite some volatility in the short term, the disinflationary process appears solidly in place. Besides, the European Commission predicts that gross domestic product (GDP) will grow by 1.3% in the eurozone next year. It is also expected that this indicator will increase by 1.6% in 2026.

The return of Donald Trump to the White House increases uncertainty about the prospects for interaction between European capitals and Washington in the economic dimension of the collaboration space between the two sides of the Atlantic Ocean. There is a possibility that Mr. Trump will impose trade tariffs on goods imported from the European Union. Most of the European Central Bank’s policymakers are convinced that the mentioned potential measures will become a deterrent in the context of the impact on economic growth. The specified financial institution President Christine Lagarde said this week that trade tariffs would trigger a little net inflationary in the short term. She also noted that the European Union would be in a better position if it held talks with the United States about the mentioned likely tariffs. In her opinion, such an approach is preferable to immediate countermeasures.

Christine Lagarde has also repeatedly warned about the negative consequences of a potential full-scale trade war. According to her, the European Union could offer to buy certain things from the United States and signal readiness to sit at the table and see how Washington and European capitals can work together.

Joachim Nagel warned that tariffs from Washington could cost Germany 1% of output. For Berlin, the implementation of such a scenario would be a terrible scenario for the future. Currently, the German economy is going through a difficult period, the main reason for which is the continued weakness of the local manufacturing sector. It is worth noting that the potential deterioration of the economic situation in Germany may become a factor of a kind of cascading impact on the entire eurozone. The corresponding probability is related to the fact that the economy of the mentioned country is the largest in the specified region.

It is worth noting that armed conflicts in different regions of the world are another risk for the eurozone. The potential implementation of an escalation scenario in the Middle East will be a kind of bump to the vulnerability of European energy security. For the eurozone economy, this will mean an unambiguous deterioration of the situation, as oil and gas prices will begin to rise.

As we have reported earlier, Euro-Area Economy Growth Beats Expectations.