Consumer prices in the eurozone increased by 2.0% year over year in December, according to Eurostat’s flash estimate, down from November’s reading of 2.1%. This was in line with consensus estimates, and with the European Central Bank’s 2% target. Lower energy prices contributed to the moderation.
Core inflation, which shows prices without volatile components such as energy and food costs, came in at 2.3% in December, lower than economists expected and down from the prior three months’ readings of 2.4%.
The euro traded little changed against the US dollar following the release, and stock markets remained broadly neutral.
“Euro inflation is back to 2%, bang in-line with the ECB’s targeted rate. The move should please equity markets, as it gives the ECB yet another reason to cut interest rates further in 2026,” says Michael Field, chief European markets strategist at Morningstar. “That said, inflation has been hovering either side of the 2% level for most of last year, so today’s move is minor, but a positive, nonetheless.”
Services Inflation Remains the Key Driver
According to Eurostat’s estimates, services inflation remained the highest contributor at around 3.4% in December, slightly below November’s 3.5%, but still the key driver of core inflation.
Energy prices fell again, down 1.9% versus a year earlier, compared with a 0.5% decline in November. Food, alcohol and tobacco prices were up by 2.6%, the highest rate since September, while non-energy industrial goods prices rose by 0.4%, slightly down from November.
On a month over month basis, overall inflation picked up by 0.2%.
Will the ECB Cut Rates in February?
With inflation right at the ECB’s medium-term target level, further interest rate cuts in February appear unlikely, with swap markets pricing in stable rates for most of 2026. During the prior week, there was a marginal uptick in implied rates for the final ECB decision of 2026. This has since faded, suggesting that expectations of a potential rate hike later in the year have diminished.
“Central bankers walk a tightrope, attempting to stimulate the economy without igniting inflation,” says Morningstar’s Field. “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.”
DWS senior economist, Ulrike Kastens, sees a chance of inflation dipping below 2% in the coming months, but doesn’t expect this to result in a change in ECB policy: “The ECB views itself as well-positioned. Against a backdrop of moderate growth and a stable labor market, the deposit rate should remain at 2% this year.”
German Inflation Slows Sharply
Inflation rates varied widely across the bloc, with annual inflation rates ranging from 0.1% in Cyprus to 4.1% in Estonia and Slovakia.
German inflation came in at 2.0%, sharply down from the prior month’s reading of 2.6% and the lowest level since July 2025. French inflation fell to 0.7% year over year in December, while Italy and Spain posted annual rates of 1.2% and 3.0%, from 1.1% and 3.2% in November, respectively. Dutch inflation stood at 2.5% year over year, down from 2.6% in November.
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