Inflation in Euro Zone Falls to 2.4% in November From 2.9% in October, Fuelling Bets on Rate Cuts

What Does This Mean for Markets and the European Central Bank?

Euro zone inflation recorded a more than expected decrease in November for the third straight month, challenging the European Central Bank’s narrative on stubborn price growth. The decreasing inflation is fueling bets on early spring rate cuts, despite the bank’s explicit guidance, with hard data showing a faster fall in inflation than expected.

Inflation has been falling rapidly towards the ECB’s 2% target from levels above 10% just a year ago, but policymakers have cautioned against excessive optimism. The data challenging this outlook, showing inflation dropping to 2.4% from 2.9% in October, dragged lower by nearly all items, including underlying price pressures.

The quick inflation slowdown puts the euro zone central bank and investors on a collision course, as both are predicting different paths ahead for consumer prices and ECB interest rates.

The ECB argues that inflation will bounce back above 3% next year and only hit the 2% target in late 2025, partly due to rapid nominal wage growth. Investors, however, are increasingly ignoring the ECB President’s guidance for steady rates for several quarters, with a first rate cut by April fully priced in.

Some economists argue that current inflation modeling is exceptionally difficult, as corporate profits are the main driver, not wages as in normal bouts of rapid inflation. This has led to expectations for rate cuts in 2024, with the first one possibly happening before the summer.

With a third month of unambiguously good inflation reports and with prices actually declining from the previous month, it is starting to look that before long we will be talking about inflation being too low rather than too high,” said Kamil Kovar, a senior economist at Moody’s Analytics.

These recent trends in inflation and growth are leading some to speculate that 2024 will be the year when the ECB implements a pirouette in monetary policy.