According to data published by Eurostat on Wednesday, Eurozone inflation cooled to the European Central Bank’s target of 2% in December, as easing energy costs helped temper persistent domestic price pressures. The figure came below the 2.1% level seen in November and matched economist forecasts in a Reuters poll.
Energy prices continued to weigh on overall price growth, effectively offsetting a climb in food inflation. Meanwhile, core inflation—which excludes the more volatile food and energy segments—saw a modest decline, sliding to 2.3% from 2.4% due to slower increases in services and industrial goods.
For the majority of 2025, inflation hovered close to the ECB’s target, with policymakers predicting that price growth will remain near this level for several years, even if inflation temporarily dips below target over the course of this year and the next.
Despite some officials expressing concerns that lower inflation could dampen wage growth and entrench sluggish price increases, most appear unconcerned, suggesting that the current softness is largely the result of transitory energy price fluctuations.
The ECB signaled last month that it does not intend to change policy direction in the near term, reinforcing market expectations that the key deposit rate will be held at 2% through the remainder of 2026. However, should inflation fall significantly below target, discussions over monetary easing could resurface.
The central bank faces conflicting pressures, with sinking energy prices, robust euro strength, increasing imports from China, and easing wage growth all likely to moderate inflation. In contrast, healthy domestic demand, significant German fiscal outlays, a tight labor market, higher defense expenditure, and geopolitical uncertainties could drive prices upward.
The ECB’s next policy meeting is scheduled for February 5, while it is widely expected to refrain from offering long-term forward guidance, leaving future rate cuts or further easing as possibilities.
