The eurozone’s inflation rate climbed to 2.4% in December, marking its third consecutive increase and raising fresh alarms about potential “stagflation”—a troubling mix of inflation and stagnant growth.
The European Central Bank (ECB) unveiled the year-on-year data on January 7, confirming a jump from November’s 2.2%.
Analysts, speaking to European media, warned the rising inflation underscores a faltering economy and a hesitant approach to interest rates by the ECB. Despite efforts to control inflation, the ECB appears unable to bring the rate below its 2% target.
“While this rise aligns with expectations, the spotlight remains on the region’s faltering economy,” commented Richard Flax, a former Goldman Sachs executive director.
The eurozone’s economy grew a modest 0.8% in 2024, with uneven contributions across member states. France and Germany, the bloc’s two largest economies, are in economic turmoil, while Spain, contributing only 10% of the eurozone’s GDP, accounted for a staggering 40% of its growth.
Germany’s manufacturing sector, heavily reliant on energy, has struggled with restricted Russian gas supplies and fierce competition from cheaper Chinese exports. Adding to the challenge, strict German regulations have left startups in a weaker competitive position, according to Jari Stehn, Goldman Sachs’ chief European economist.
Inflation in Germany reached 2.8%, outpacing the eurozone average. Belgium saw an even higher rate of 4.4%, while Ireland recorded the lowest at 1%, though its inflation also ticked up in December.
Perhaps most concerning for the ECB is the rise in core inflation, which strips out volatile items like food and energy. Core inflation rose by 0.5% in December, with service prices increasing even more, surging 4%.
These figures signal deeper systemic issues that are proving harder to control, despite widespread anticipation that the ECB will lower interest rates to 3% at its January 30 meeting.
Investors and economists are calling on the ECB to take bolder action. Richard Flax, now chief investment officer at Moneyfarm, noted that investors are urging larger rate cuts to support the struggling economy. GianLuigi Mandruzzato, senior economist at EFG Asset Management, cautioned, “The risk is that the ECB remains behind the curve and eventually interest rates will have to be reduced more than markets currently anticipate.”
The euro’s position remains precarious, with Daniela Sabin Hathorn, senior market analyst at Capital.com, pointing out that the ECB’s dovish stance has left the currency “struggling to find its footing.” The euro remains vulnerable to the US dollar, which is gaining strength thanks to US President-elect Donald Trump’s plans for new tariffs.
These tariffs are expected to push the US Federal Reserve to maintain high interest rates to combat inflation, further boosting the dollar and placing additional pressure on the euro.
With inflation persisting and growth stagnating, the eurozone faces a critical juncture. The ECB’s next moves will be closely watched, as its ability to manage interest rates and stabilize the economy will determine whether the region can navigate this challenging period.
