Euro-Zone Inflation Picks up, Backing Cautious Approach on Rates

The eurozone's annual rate of inflation climbed back to target in October, increasing the likelihood that policymakers will lower borrowing costs for a third straight meeting. Consumer prices were 2.0% higher than a year earlier across the 20-member currency area, a pickup from September's 1.7% rate. Services inflation, which earlier in the year had kept price rises stubbornly above target, was unchanged at 3.9%, as was the core rate of inflation at 2.7%. With prices rising broadly in line with their expectations, ECB policymakers are becoming more confident that they are on course to tame the surge in inflation that followed Russia's full-scale invasion of Ukraine early in 2022.

The resultant energy shock drove consumer prices rapidly higher across the continent and around the world. However, high wage pressures, the outcome of upcoming wage negotiations, and intensifying geopolitical tensions add uncertainty around the future path of inflation. The rapid pace of disinflation that we observed in 2023 is likely to slow down in 2024, and to pause temporarily at the beginning of the year, as was the case in December 2023. Positive energy base effects will kick in and energy-related compensatory measures are set to expire, leading to a transitory pick-up in inflation, similar to what has happened with Spanish headline inflation in recent months. Inflation in Spain peaked in July 2022, reaching 10.7%, and disinflation set in earlier than in other euro area countries, with the rate coming down to 1.6% in June 2023. Since then, the large drop in energy prices has fallen out of the calculation and inflation increased by an average of 3% between July and December.


The ECB's cautious approach to interest rate cuts reflects its commitment to maintaining price stability while supporting economic growth. As inflation remains above the ECB's 2% target, policymakers must balance the need to control inflation with the risk of slowing economic growth. Geopolitical tensions and energy prices play a pivotal role in shaping the ECB's inflation outlook, as the conflict in the Middle East and Russia's war against Ukraine pose particular upside risks to inflation. The ECB remains vigilant to these risks and their potential impact on commodity prices, which remains highly relevant for their inflation outlook.


In conclusion, the eurozone's recent inflation pickup signals a cautious approach to interest rate cuts by the European Central Bank. As the ECB navigates the delicate balance between controlling inflation and supporting economic growth, it must remain vigilant to geopolitical risks and energy price volatility. The future path of inflation will depend on how these dynamics evolve and interact with other factors, such as wage and productivity growth, fiscal policy, and global economic conditions.