Inflation in the eurozone returned to the European Central Bank’s 2% target in December, offering reassurance to policymakers as price pressures continue to ease.
Eurozone inflation fell to 2% in December, meeting the European Central Bank’s price stability target and reinforcing signs that the sharp surge in prices seen over recent years is continuing to fade.
Flash estimates published by Eurostat on Wednesday show the annual rate of consumer price growth slowed from 2.1% in November to 2.0% in December, in line with market expectations.
Underlying price pressures also eased. Core inflation, which strips out volatile food and energy components and is closely watched by policymakers, fell to 2.3% year-on-year from 2.4% in November, its lowest level since August.
On a monthly basis, consumer prices rose by 0.2% in December, rebounding from a 0.3% decline the previous month.
The breakdown of inflation highlights a familiar pattern. Services continued to record the strongest annual increase, at 3.4%, although this was slightly down from November.
Food, alcohol, and tobacco inflation edged higher to 2.6%, while non-energy industrial goods saw prices rise by just 0.4%.
Energy prices remained firmly in negative territory, falling 1.9% compared with a year earlier, a key factor behind the broader slowdown in headline inflation.
ECB's policy in good place
With both headline and core inflation now stabilising, financial markets see limited scope for immediate action by the ECB.
According to the betting platform Polymarket, there is a 97% probability that interest rates will remain unchanged at the next Governing Council meeting in February.
The odds of a rate cut during 2026 stand at 45%, while a rate hike is seen as more unlikely, at 11%.
"The key takeaway is that price pressures are normalising after several turbulent years," said Professor Emeritus Joe Nellis, economic adviser at MHA, in an emailed comment.
“Headline and core inflation are now moving within a relatively narrow range, which suggests that the extreme volatility of the recent past is behind us, even if risks have not disappeared,” he added.
According to Nellis, caution is likely to remain the dominant theme.
“Policymakers are understandably wary of declaring victory too soon,” he said.
“Wage dynamics, shifts in global energy markets, and uneven demand across member states still pose risks to the outlook. The ECB is therefore more likely to keep borrowing costs steady unless there is a pronounced deterioration in economic conditions.”
What the inflation figure means for households and firms
The softer inflation backdrop offers some relief for households whose purchasing power has been eroded by years of rapid price increases.
More stable prices also help businesses plan investment and staffing decisions with greater confidence. However, the return of inflation to target has coincided with only modest economic momentum.
Consumer spending remains subdued in several countries, industrial output has struggled to regain strength and cross-border trade shows signs of inertia.
Nellis cautioned that this combination presents a delicate challenge for policymakers. “Price stability is returning, but growth remains fragile,” he said.
“The ECB’s task now is to support a recovery without allowing inflation to reignite. That balancing act will define the policy debate over the coming months.”
DAX climbs to record highs
In equity markets, Germany’s DAX index extended its rally, rising 0.5% to 25,150, a new record high and eyeing the seventh consecutive day of gains.
Siemens and Siemens Energy led the advance, rising 2.2% and 1.8%, respectively.
Other major European indices posted mixed results, with markets in France and Italy retreating slightly.
The euro held steady at $1.1685, while eurozone sovereign bond yields edged lower.
German Bund yields fell five basis points to 2.78%, reflecting investor confidence that inflation remains under control and that the ECB will maintain its current stance for now.
