In November, inflation in the eurozone decreased more significantly than anticipated, nearing the European Central Bank's target. This development raises the prospect of interest-rate cuts occurring sooner than previously predicted.

  • According to preliminary data released by the European Union's statistics agency Eurostat on Thursday, the bloc's consumer price index, which gauges the cost of goods and services, increased by 2.4% year-on-year, a deceleration from the previous month's 2.9%.
  • This represents the lowest rate since July 2021, with economists expecting a 2.8% year-on-year increase. Eurostat reported a 0.5% month-on-month decline in consumer prices.

The headline rate is approaching the ECB's 2% inflation target, suggesting that the central bank's recent aggressive tightening cycle may be coming to an end. The ECB's key deposit rate has surged from minus 0.5% in June 2022 to 4.0% in September of this year.

Easing Sooner Than Later?

While ECB decision-makers have been cautious about discussing easing monetary policy, the larger-than-expected drop in inflation makes it increasingly challenging for policymakers to deny the possibility of contemplating rate cuts, as noted by Capital Economics' chief Europe economist, Andrew Kenningham.

  • Money markets are currently factoring in a 25 basis point interest-rate cut in April, according to Refinitiv data.
  • Core inflation, which excludes volatile energy, food, alcohol, and tobacco prices and is closely monitored by ECB policymakers for insights into underlying inflationary trends, decreased from 4.2% to 3.6%, contrary to the expected 4.0%.

A slowdown in the eurozone economy, which contracted by 0.1% in the third quarter of this year, is further prompting the Frankfurt-based bank to consider an earlier reduction in borrowing costs to stimulate consumption. Economists anticipate flat growth in the last three months, according to a FactSet consensus.

Energy Prices Pushing Down Inflation

Headline inflation was primarily influenced by a decline in energy prices, which were 11.5% lower year-on-year in November, exceeding the 11.2% fall recorded in October. This comes amid falling oil prices in the international market, despite geopolitical concerns related to conflicts in the Middle East and Ukraine.

  • In addition, food prices in the eurozone decreased from 7.4% in October to 6.9% in November, while services inflation dropped from 4.6% to 4.0% over the same period.
  • Among the largest economies in the bloc, annual inflation rates fell to 2.3% in Germany, 3.8% in France, 0.7% in Italy, and 3.2% in Spain, according to EU-harmonized data.

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