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Eurozone consumer prices rose 2.3% in the year up to November, as expected, but shrank by –0.3% month-on-month, versus a –0.2% estimate.
Core inflation also came in under the forecast at 2.7%, although the market reaction has been minimal.
The uptick on the headline is purely the result of energy price volatility last year, so that is irrelevant for policy. Underneath, there is a lot for the ECB to like here.
Monthly services inflation is highly negative at -0.9%, and that has fed through to a lower yearly print of 3.9% and a downside surprise on core inflation. And with the growth picture looking soft, there is still no doubt that inflation will fall to 2% on a sustainable basis next year.
But rate expectations are completely unmoved. The market appears to have settled on a 25bp cut in December, particularly after Schnabel’s standout hawkish commentary wiped out the remaining bets on 50bps this week. The economy is not falling off a cliff just yet and there is uncertainty about where the neutral rate is, so there is no pressing need to start frontloading cuts.
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