The eurozone is facing renewed inflationary pressures as 2025 begins, with consumer prices climbing to 2.4% in December – the highest rate since July. This increase marks the third consecutive month of accelerating inflation, exceeding the European Central Bank’s (ECB) 2% target, and adds pressure on the ECB to stabilise prices while supporting the region’s faltering economy.
December’s inflation increase, up from 2.2% in November, reflects a combination of surging energy costs and persistent price increases in the services sector The services sector remains the primary driver of inflation, recording a 4% increase in December. Other notable contributors include processed foods, alcohol, and tobacco, which increased by 2.9%. In contrast, non-energy industrial goods remained stable at 0.5%, while energy prices rebounded marginally by 0.1% after months of decline.
Divergence among Member States and factors
Inflation rates vary widely across the eurozone. Fourteen of the twenty eurozone economies experienced price increases in December, with some countries experiencing significantly high rates: Croatia (4.5%), Belgium (4.4%), and Estonia (4.1%). On the other hand, the countries that did better in controlling inflation were Ireland (1.0%), Italy (1.4%) and Luxembourg (1.6%). Among major economies, both Germany and Spain reported 2.8% inflation, while France (1.8%) and Italy (1.4%) maintained lower rates.
Germany’s inflation rebound is particularly concerning given its stagnant economic growth and importance in steering economic growth in Europe. A contracting major economy coupled with rising prices and an upcoming general election in February, complicates the ECB’s task of balancing rate cuts to stimulate growth while avoiding excessive monetary easing that could reignite inflation. Spain, meanwhile, faces its own difficulties with the Eurozone’s highest unemployment rate at 11.2%, as rising prices exacerbate its vulnerabilities.
France’s political challenges add further uncertainty. The country has yet to approve its 2025 budget—a task initiated by Michel Barnier’s impeached government and now taken up by François Bayrou’s new administration. The process is likely to be fraught given the fragmentation in the French Parliament. Without a budget in place, France risks plunging into political instability.
On the other hand, several other factors compound the ECB’s challenge to control inflation: ongoing geopolitical tensions in Ukraine and the Middle East, and potential trade disruptions from Donald Trump’s anticipated return to the White House. Consumer expectations are also trending upward, with eurozone residents anticipating 2.6% inflation for the coming year, up from previous forecasts.
The ECB’s delicate “balancing” act
The ECB has cut interest rates four times since June, bringing interest rates to 3%. Nonetheless, inflationary pressures persist, leaving the central bank facing the difficult task of balancing inflation control with the need to avoid stifling economic growth. Its strategy of gradual interest rate adjustments reflects this precarious balance as it seeks to navigate competing priorities.
As 2025 unfolds, the ECB’s ability to manage inflation without derailing economic recovery will be crucial. While progress has been made since the inflationary peaks of recent years, the latest data underscores that achieving price stability remains a formidable challenge. With inflation still above target in most member states, the coming months will test the ECB’s adaptability in addressing pressures from both domestic and global forces.
