Eurozone inflation falls to ECB’s 2% target as price pressures ease

Eurozone inflation fell to 2% in December, meeting the European Central Bank’s price stability target and reinforcing signs that the sharp surge in prices seen over recent years is continuing to fade.

Flash estimates published by Eurostat on Wednesday show 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 strips out volatile food and energy components and is closely watched by policymakers, fell to 2.3% year-on-year from 2.4% in November, its lowest level since August.

On a monthly basis, consumer prices rose by 0.2% in December, rebounding from a 0.3% decline 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 non-energy industrial goods saw prices rise 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.

ECB's policy in good place

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.

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“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.”

What the inflation figure means for households and firms

The softer inflation backdrop offers some relief for households whose purchasing power has been eroded by years of rapid price increases.