Inflation is expected to tick up slightly in the Eurozone this month, a development that economists say will keep the European Central Bank (ECB) on course for a third consecutive rate cut in December. This forecast reflects ongoing concerns about sluggish economic growth across the region and a softening core inflation rate.

Eurozone Inflation Outlook

According to a poll of economists, the Eurozone’s headline inflation rate is predicted to rise to 1.9% in October, up from 1.7% the previous month. This moderate increase aligns with the ECB’s medium-term target of 2% inflation, a threshold meant to encourage sustainable economic growth without overheating the economy. Despite the uptick, inflation remains subdued enough to suggest that the ECB will proceed with its expected rate cut in December to support economic activity.

Meanwhile, the core inflation rate—which excludes the often volatile sectors of energy, food, alcohol, and tobacco—is forecasted to decline slightly to 2.6% from September’s 2.7%. This deceleration is another indicator of the Eurozone’s cooling economic activity, despite price increases in more stable categories like services.

Monthly Changes in Core Inflation

On a monthly basis, the core inflation rate is projected to edge up to 0.2% in October after a -0.1% drop the month before. Nomura, an international investment bank, anticipates a more substantial annual increase in headline inflation, reaching the 2.0% mark. The bank attributes this rise to “base effects,” or a statistical comparison to lower inflation rates from the previous year, rather than any immediate pressures pushing prices higher.

Fuel prices, for instance, likely continued their decline in October, according to high-frequency data from gas stations, while services inflation is expected to hold steady at around 3.9%. Nomura predicts that, though transportation prices may not have the same downward impact they did in September, the more gradual increases in recreational services like restaurants will continue to moderate core inflation.

ECB Policy Shift: Another Rate Cut Expected in December

Faced with slowing economic growth, the ECB has pivoted towards a more aggressive policy of monetary easing, implementing back-to-back rate cuts in recent months. With inflation not presenting an immediate threat, most analysts expect a further rate reduction at the ECB’s December meeting. Some ECB Governing Council members have even hinted at a larger-than-usual 50-basis-point cut, following three 25-basis-point cuts since June.

This sustained easing approach by the ECB is aimed at countering ongoing economic worries across the Eurozone, where slower growth and a cooling labor market have created headwinds. Lower interest rates could stimulate borrowing and spending, potentially lifting consumer confidence and boosting economic growth.

National Inflation Data Highlights Regional Trends

Preliminary national data indicate modest inflation increases across several key Eurozone economies:

• Spain reported on Wednesday that its harmonized inflation rate edged up to 1.8% in October from 1.7% in September, aligning with forecasts.
• Germany will release its preliminary October inflation figures on Wednesday afternoon, with economists expecting a rise to 2.1%, up from last month’s 1.8%.
• France is set to publish initial October inflation data early on Thursday, with a slight increase to 1.5% anticipated, up from 1.4% in September.
• Italy will release its preliminary inflation data concurrently with the broader Eurozone report, and analysts predict an increase to 0.8% from September’s 0.7%.

These national inflation indicators support the broader trend of mild inflationary pressure, reinforcing the likelihood of ECB action in December. The Eurozone’s final inflation data, due Thursday at 10:00 GMT / 11:00 CET, will provide a clearer picture of these trends and their potential impact on ECB policy decisions.

Economic Concerns Keep ECB on Alert

While the Eurozone’s inflation rate is edging closer to the ECB’s target, underlying economic concerns and a tapering core rate suggest a more cautious approach may be needed. The ECB’s upcoming December meeting is likely to produce another rate cut, as policymakers work to shore up growth in the face of persistent economic headwinds.