Introduction to Euro-Area Inflation
The euro area has witnessed a decline in inflation, with the rate falling to 2.0% year on year in December, according to estimates from Eurostat. This decrease is a result of lower energy prices and matches the forecasts made by economists. The European Central Bank (ECB) has a target inflation rate of 2%, and the current rate is in line with this target.
Key Takeaways
- Euro-area inflation declined to 2.0% year on year in December.
- Core inflation fell to 2.3% year over year, which is lower than expected.
- The odds of an ECB rate cut in February remain low.
Services Inflation Remains the Key Driver
Services inflation remains the highest contributor to core inflation, at around 3.4% in December. This is slightly below the November rate of 3.5%. Energy prices continue to decline, with a 1.9% decrease compared to the previous year. Food, alcohol, and tobacco prices have increased by 2.6%, which is the highest rate since September. Non-energy industrial goods prices have risen by 0.4%, which is slightly down from November.
Will the ECB Cut Rates in February?
With inflation at the ECB’s medium-term target level, further interest rate cuts in February appear unlikely. Swap markets are pricing in stable rates for most of 2026. Central bankers are walking a tightrope, attempting to stimulate the economy without igniting inflation. According to Morningstar’s chief European markets strategist, Michael Field, "Central bankers walk a tightrope, attempting to stimulate the economy without igniting inflation. But with inflation low and steady, they should be able to take their foot off the brake and lean towards more stimulus sooner rather than later."
A Mixed Picture Across the Eurozone
Inflation rates vary widely across the eurozone, with annual inflation rates ranging from 0.1% in Cyprus to 4.1% in Estonia and Slovakia. German inflation has decreased to 2.0%, down from 2.6% in the previous month. French inflation has fallen to 0.7% year over year, while Italy and Spain have posted annual rates of 1.2% and 3.0%, respectively.
Conclusion
In conclusion, the euro area has witnessed a decline in inflation, with the rate falling to 2.0% year on year in December. This decrease is a result of lower energy prices and is in line with the ECB’s target inflation rate. While services inflation remains the key driver, the odds of an ECB rate cut in February remain low. The inflation rates vary widely across the eurozone, with some countries experiencing higher or lower rates than others. As the ECB continues to monitor the situation, it is likely that interest rates will remain stable for most of 2026.
