Euro zone inflation hits 2% in December, in line with forecasts

• Core inflation (excluding energy, food, alcohol, and tobacco) fell to 2.3% from 2.4% in November, while services inflation decreased to 3.4% from 3.5%
• The ECB maintained its deposit facility rate at 2% for the fourth straight meeting in December after cutting rates in June 2024 as part of a broader easing cycle
• The central bank continues to emphasize a meeting-by-meeting, data-dependent approach to future rate-setting decisions

Euro Zone Inflation Summary

Key Data Points:

Euro zone inflation reached 2% in December, matching both economist forecasts and the European Central Bank's (ECB) target rate, according to flash data released Wednesday by Eurostat. This marks a deceleration from November's higher reading.

Core inflation, which excludes volatile categories like energy, food, alcohol, and tobacco, fell to 2.3% year-over-year in December from 2.4% in November. Services inflation also cooled slightly to 3.4% from 3.5% during the same period.

Monetary Policy Context:

The ECB maintained its key deposit facility rate at 3% for the fourth consecutive meeting in December. The central bank last cut rates in June as part of an ongoing rate-cutting cycle that reduced rates from 2024's peak of 4%. ECB officials indicated late last year that further rate cuts are likely in 2025, though the bank emphasizes a meeting-by-meeting, data-dependent approach to policy decisions.

Market Implications:

The inflation data meeting expectations and aligning with the ECB's target provides validation for the central bank's current monetary policy stance. The continued cooling of both headline and core inflation, along with moderating services inflation, supports the case for additional rate cuts in 2025. This environment suggests a gradual normalization of monetary policy as price pressures ease across the euro zone.

The combination of inflation at target and persistent rate-hold signals suggests the ECB is carefully balancing economic growth concerns against inflation management, with markets likely pricing in further accommodation ahead.