Eurozone inflation bounce to unwind in the coming months

The rebound in headline inflation was driven largely by energy, with both the lower base from last year but also recent weakness in the euro contributing to higher petrol prices, as well as higher gas and electricity prices with Europe running down its gas inventories somewhat faster than usual this winter. Elsewhere, inflation dynamics were broadly unchanged, with goods inflation continuing to hold near zero, and food inflation holding at a benign 2.7%.

2% target to be reached again by Q2

The main upward pressure on inflation continued to come from services inflation, which stayed at 4% y/y, although services inflation momentum – measured by the 3m/3m annualised rate – continued to cool, falling to 2.7% from 2.8%. We think there could be some residual seasonality in the data, with a similar drop in services inflation observed late last year, and we expect services inflation to pick up again over the coming months given still-elevated wage growth in the eurozone, and with many services providers tending to raise prices in January. However, we expect this pickup to prove temporary and well within the broad trend of cooling inflation. Big picture, we expect headline inflation to resume its fall already from February as energy base effects fade, with the 2% target expected to be reached sustainably by April. Core inflation is expected to stay more elevated in the near-term due to services, with a more sustained fall expected around the middle of 2025.

ECB will continue cutting in the near-term

All told, the incoming inflation data continues to be broadly in line with both our and the ECB’s forecasts, and given the ongoing subdued nature of the recovery – and the downside risks – we expect the ECB to continue cutting rates at coming meetings. The next rate cut is expected at the 30 January Governing Council meeting, when we expect the deposit rate to fall by 25bp to 2.75%. (Bill Diviney)

The Netherlands: 2024 ends with the highest inflation figure of the year

The flash estimate of Dutch inflation (CPI) came in at 4.1% for December, which is up from 4.0% in November and marginally higher than our expectation (4.0%). This brings total inflation for 2024 to 3.3%. The rise in December was largely driven by firming services inflation as well as less favourable energy base effects. Services inflation can partly be attributed to the higher housing rent indexation with services for housing contributing roughly 1pp to the figure. As the HICP does not account for costs related to home ownership, it came in lower at 3.9% in December. Broader services inflation is affected by elevated wage growth. Compared to the eurozone average, the higher inflation peak in 2022 leads to a larger catch-up in wages, which in turn causes larger second-round effects on for instance services prices. Also, the relatively tight labour market plays a role in the high wage growth.

We expect inflation to ease somewhat in the coming months, and average 3.1% in 2025 and 2.5% in 2026. Given still elevated wage growth, a tight labour market and an expansive stance by the Dutch government, inflation will stay above the eurozone average throughout 2025. (Aggie van Huisseling)