The consensus is that EuroStat will report that inflation increased in the Euro Area during December when it releases its preliminary data on Tuesday. But, the consensus is also that the ECB is inclined to keep easing, potentially even more aggressively. What’s behind this seeming contradiction, and what does it mean for the markets?
The Euro ended 2024 at the weakest it has been in years. In the first two relatively light trading days for 2025, it has managed to stage a bit of a recovery. The bulk of those gains came after partial data from German states showed that inflation was running a little hotter than the market had anticipated. This implies that prices might be going higher across the whole of the EuroZone.
An Expected Bump
However, stronger inflation might not have a lasting effect on the currency. That’s because a bump up in inflation through the winter has been anticipated by the ECB, and is being taken into account by its monetary policy. The central bank has been easing all last quarter even as inflation rose. That’s because the expectation is that inflation will turn around sometime in the first quarter of this year.
Also, inflation is being driven by factors outside of the control of monetary policy. Unusually cold winter weather has combined with an end to Russia’s supply of gas through Ukraine into Europe. Stores of natural gas have been depleting at the fastest rate in over two years, pushing up the price of energy to highs not seen since 2023 – when inflation was a considerable concern.
It’s All About the Timing
Inflation in the headline number is seen rising due to these sorts of volatile elements, but the core rate is expected to remain steady. If the weather improves, and demand for peaking power in Europe subsides (like it did later in the winter of 2023-2024), then the increased cost will likely not filter through the long-term inflation rate. ECB President Christine Lagarde said just last week that she expects CPI to get down to the 2.0% target this year, reiterating her stance despite the higher inflation expected.
Meanwhile, economists are worried that the ECB has waited too long to start easing, pointing to the deteriorating economic situation. A small majority of economists polled by the Financial Times at the start of the year said that the ECB needs to do more easing than is currently expected. None of the economists recommended a shift to a more hawkish policy. All of this suggests that the ECB could be under pressure to keep easing as long as the economic indicators keep flashing warnings.
What to Look Out For
What could change analysts and economists’ minds is if there is a sudden, unexpected jump in the core inflation rate. Otherwise, beats in the headline rate might lead to transient strength in the Euro, with the trend set by the difference in interest rates with the US reasserting itself after the market digests the news.
The average forecast among analysts is that annual inflation in the Euro Area will have ticked up to 2.4% in December from 2.2% prior. But the core rate is expected to stay unchanged at 2.7%.