Eurozone services inflation is losing momentum. Will it continue?

The flash estimate for HICP inflation picked up to 2.3% y/y in November (October: 2%), in line with our and consensus expectations. The move higher in headline inflation is largely mechanical, and reflects the much lower base in energy prices, which fell sharply this time last year. Meanwhile, core inflation held steady at 2.7%, against our and consensus expectations for a marginal pickup to 2.8%. The 2.7% was on the borderline (unrounded, core inflation picked up to 2.74% from 2.69%), but there was some genuine good news on the ECB’s closely-watched services inflation measure, which held steady at 3.9%, against our expectation for a pickup to 4%. Indeed, on a seasonally-adjusted basis, services prices actually fell -0.1% m/m, taking the 3m/3m annualised rate sharply down to 2.6%, from 3.5% in October, and well below this year’s peak of 5.5% set in May. The lower print is an encouraging sign that businesses are to some extent absorbing still-elevated wage growth into their margins rather than fully passing on higher costs to consumers.

Services inflation to stay elevated in the near term, but will normalise in 2025

Over the medium term, and assuming constant productivity growth, services inflation is driven by wage growth – for which headline measures remain elevated, while leading indicators (such as the Indeed tracker) suggest a gradual normalisation. The ECB’s measure of negotiated wage growth is expected to stay on the high side in the near term, and businesses may find it more difficult to absorb high wage growth into their margins, given the subdued outlook for productivity growth. Given this, we expect services inflation to hold at current elevated levels, or perhaps even to edge slightly higher again in the near term. However, we continue to think services inflation has peaked, and expect it to slowly fall back to around 3% by the end of 2025. This will be helped by the still-subdued recovery, with the economy expected to slow later in 2025 as US import tariffs are brought in. Meanwhile, headline inflation is expected to pick up a bit further in December, but is then likely to fall sustainably back to the 2% target by the middle of 2025, helped by lower oil prices. This will pave the way for inflation to dip below the target in 2026, which – alongside slower growth – will cause the ECB to cut rates into stimulative territory, with the deposit rate expected to fall to 1% by early 2026. In the near-term, we continue to expect the ECB to cut rates by 25bp at the 12 December Governing Council meeting. Financial markets – though briefly pricing in a higher probability of a 50bp cut following the weak flash PMIs last week – have since moved closer to our view, pricing in around 29bp of cuts in December. (Bill Diviney)

The Netherlands: Inflation increased on the back of firming services and less favourable base effects

The flash estimate of Dutch inflation (CPI) for November came in line with our and consensus expectations at 4.0% y/y. Inflation increased compared to October (3.5%). The increase was driven by less favourable base effects in goods and energy, which caused a drag on inflation in the past months, as well as a slight firming of services inflation compared to October (5.5% versus 5.4%). The firming of services inflation is contrary to what we see in the eurozone, where services inflation has held steady or even eased on a 3m/3m basis.

Elevated wage growth, a tight labour market and an expansive fiscal stance by the Dutch government will keep inflation above the eurozone average throughout 2025. We expect inflation (CPI) to average 3.3% in 2024 and 3.1% in 2025. (Jan-Paul van de Kerke)