Euro zone inflation accelerated in November and its most closely watched components remained high, data showed today, adding to the case for a more cautious European Central Bank interest rate cut next month.
Consumer price inflation in the 20 countries sharing the euro stood at 2.3% in November, according to the data from Eurostat.
That was higher than 2% a month earlier and the ECB’s 2% target but in line with expectations.
Inflation mostly rose on a statistical base effect, as last year’s exceptionally low figures were knocked out of the time series, replaced by still relatively modest, but somewhat higher figures, leading to a 0.3% fall in prices on the month.
Underlying inflation, the ECB’s prime focus when setting interest rates, meanwhile held steady at 2.7%, as the small slowdown in services costs was offset by higher goods inflation.
Price growth in services, the single largest item in the consumer price basket, has hovered on either side of 4% for the past year and slowed to 3.9% this month from 4%.
Services prices tend to be higher than the overall average but policymakers argue that a figure closer to 3% is desired since the drag from energy and imported goods will fade over time.
Today’s reading, however, does little to alter the overall picture that inflation is slowly heading back to the ECB’s target on a more durable basis next year, so further cuts in the 3.25% deposit rate remain warranted.
The key question for now is whether a 25 basis point move on December 12 is enough or whether the bank should opt for a bigger, 50 basis point move.
Camp 25 argues that services prices remain too high for comfort and wages are still expanding quickly, supported by record low unemployment. Even if growth is low, they are consistent with the “soft landing” scenario, the ECB’s goal all along.
Supporters of the bigger cut meanwhile say that the economy continues to skirt a recession, so a bigger boost is needed to protect jobs since a rise in layoffs would dampen already weak demand, leading to more job cuts in a self-reinforcing circle.
While this debate is unlikely to be resolved until policymakers receive the ECB’s new economic projections on the eve of the December 12 meeting, even policy doves have made the case for gradualism, suggesting they could go along with a 25 basis point cut.
There is also a case to be made for keeping some powder dry until the new US administration takes office and policy ideas become actual policies, since they could have a material impact on the global economy.
Markets fully price in a smaller cut but see less than a 10% chance of a bigger, 50 basis point move now. Expectations have been volatile, however, and pricing was close to 50% last week after a particularly weak business survey.
Regardless of the December 12 move, investors are betting on a steady stream of rate cuts with policy easing anticipated at every meeting at least through next June.
The deposit rate is then seen falling to 1.75% by the end of 2025, a level low enough to once again stimulate growth.
Euro zone consumers see inflation edge up slightly, ECB survey shows
Euro zone inflation expectations for the year ahead edged up slightly in October and stayed steady for three years out, the European Central Bank’s monthly Consumer Expectations Survey showed today.
Median inflation expectations for the next 12 months picked up to 2.5% from 2.4% previously while expectations for three years ahead remained unchanged in at 2.1%, the ECB, which targets price growth at 2%, said after surveying around 19,000 adults in 11 euro zone countries.
Consumer expectations have been dropping steadily for years in line with the slowdown in overall price growth and indicate that consumers largely believe the ECB’s narrative that victory over runaway inflation is within sight.
Consumers, however, became more pessimistic on growth, as expectations for the next 12 months fell to -1.1% from -0.9% seen in September, the ECB added.
In line with this growing pessimism, nominal income growth expectations decreased to 1.1% from 1.3%, the survey showed.
Article Source – Euro zone inflation edges up, ‘underlying’ price growth steady – RTE
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