Target Achieved! Euro Inflation Falls to 2%
Eurozone inflation has shrunk again, hitting the European Central Bank's (ECB) target. In December, annual inflation was recorded at 2.0%, down from 2.1% the previous month and in line with market expectations. This condition reinforces the view that the ECB could maintain interest rates at current levels, barring any major changes in the economic outlook.
Core price pressures have also cooled. Core inflation (excluding food and energy) fell to 2.3%, while services inflation—the ECB's most closely watched component—also softened. For more than half a year, inflation has hovered around its 2% target, giving the ECB room to maintain a steady grip on borrowing costs without needing to change policy direction hastily.
The market has responded by increasing speculation of further easing, although the scale remains limited. Market participants are pricing in a small chance of a cut through September, roughly equivalent to a 20% probability of another quarter-point cut. In the forex market, the euro weakened briefly but has since recovered and is trading steady around $1.169.
While most ECB officials agree that inflation is more under control, they remain cautious about the next steps. Global uncertainty remains high, ranging from US tariff risks, euro exchange rate dynamics, and the direction of fiscal policies in key European countries, all of which could shift inflationary pressures going forward.
The ECB also acknowledged that "vulnerabilities" remain in the services sector, which is partly being held back by strong wage growth. The most comprehensive measure of wage growth remained at around 4% in the third quarter—a figure considered too high to be truly comfortable in the long term. Christine Lagarde noted that wages are a trend to be closely monitored, although she is optimistic that wage pressures will ease as prices normalize following the post-pandemic surge.
Looking ahead, the ECB sees several factors that could push inflation away from its target, including US tariff policy, euro movements, and potential German fiscal expansion. In its baseline scenario, the ECB expects inflation to average 1.9% in 2026, before continuing to decline and returning to 2% in 2028.
Source: Newsmaker.id
