Eurozone Inflation Hits ECB Target as Price Pressures Ease in December

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 ECB’s price stability goal and reinforcing indications that the sharp surge in prices seen over recent years is gradually fading.

Flash estimates published by Eurostat on Wednesday showed that 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 excludes volatile food and energy components and is closely monitored by policymakers, fell to 2.3% year-on-year from 2.4% in November, marking its lowest level since August. On a monthly basis, consumer prices rose by 0.2% in December, rebounding from a 0.3% decline in 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 prices for non-energy industrial goods rose 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.

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.”

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.”

In equity markets, Germany’s DAX index extended its rally, rising 0.5% to 25,150, a new record high and approaching its 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 the time being.

By fLEXI tEAM