Eurozone Concludes Price Crisis: Inflation Under Control as 2024 Ends
Inflation in the Eurozone has transitioned from a major concern to a manageable issue, signaling a significant shift from the troubling levels witnessed at the beginning of 2023. While inflation rates have not yet returned to pre-crisis levels seen before the Russian invasion of Ukraine and the subsequent energy crisis, the current situation appears much less threatening. As 2024 closed, Eurostat reported a December inflation rate of 2.4%, only slightly above the European Central Bank's (ECB) medium-term target by four-tenths of a percentage point.
Despite the relative stability in inflation, there remain potential risks that could disrupt this trend. A notable concern is the impending return of Donald Trump to the White House on January 20, where he is expected to announce protectionist measures, including increased tariffs on imports. Such actions could trigger retaliatory measures, possibly leading to a trade war that may place upward pressure on prices.
Energy prices also pose a risk, as highlighted by analysts from Bank of America, who caution that fluctuations in this sector could reintroduce volatility. As the year drew to a close, many anticipated a resurgence in inflation due to statistical effects from previous declines in energy prices and the expiration of government relief measures instituted during the most challenging times.
Service prices have also contributed to the inflationary pressures, with a reported increase of 4% in December alone. This category has been a significant driver of price increases, given its substantial weight in the Eurozone's consumer price index (CPI).
While predictions indicated a rise in the CPI for December, the annual comparison still saw a positive trend, with an overall decrease of five-tenths of a percentage point compared to the previous year, which concluded with inflation at 2.9%.
Throughout 2024, inflationary pressures lessened considerably, dropping to a low of 1.7% in September--the lowest level recorded since mid-2021. This decline facilitated reductions in the ECB's official interest rates, which were lowered from 4% to 3% through a series of quarter-point cuts.
The ECB's response to this recent uptick in inflation remains to be seen, especially with forecasts suggesting that January could witness continued increases. Market speculation has indicated that the ECB might consider a half-point cut at its upcoming meeting, a move that would be unprecedented since the central bank began easing its monetary policy in Frankfurt.
However, the ECB has refrained from signaling its decisions in advance, opting instead to respond dynamically to incoming data. This approach raises questions about whether Germany's inflation rate, which finished the year at 2.8%, will prompt more cautious policymaking. The economic stagnation in Germany and broader weaknesses within the monetary area may, however, encourage a bolder stance from the ECB.
Economists at ING suggest a cautious approach, noting that the recent inflation rebound over three months, coupled with the rising core inflation--which excludes the more volatile categories of energy and fresh food--could lead monetary policymakers to uphold their prudent stance. The next crucial meeting of the monetary authorities is scheduled for January 30, which will clarify their strategy moving forward.
