Eurozone CPI rose to 2.2% in November, with stubborn service sector prices making a December rate cut by the ECB "almost impossible".

Eurozone inflation unexpectedly edged up in November, further cementing market expectations that the European Central Bank will not cut rates again in the short term.

According to data released by Eurostat on Tuesday, the harmonized CPI preliminary annual rate in the eurozone accelerated to 2.2% in November from 2.1% the previous month. For most of this year, the inflation rate has hovered near the ECB’s 2% target.

The latest inflation data confirms the ECB’s own view that inflation is now largely under control, giving policymakers ample time to observe price trends before considering any further actions. As a result, markets have almost completely ruled out the possibility of a rate cut at the ECB’s final meeting this year (December 18), and see only a one-in-four chance of any easing policy next year.

Excluding the more volatile food and energy prices, core inflation stayed unchanged at 2.4%. This was mainly due to the continued rapid rise in service prices, while price growth for durable goods was relatively moderate.

Energy prices continue to fall, but inflation remains stubborn in services and other areas

Data shows that price pressures within the eurozone—especially in the services sector—remain key drivers of inflation.

In November, service sector inflation reached as high as 3.5%, with unprocessed food prices rising by 3.3%. Meanwhile, the inflation rate for non-energy industrial goods, closely watched for its external impact, was just 0.6%, showing a mild performance. Many policymakers have said that as long as core trends align with targets, minor deviations in the inflation rate are acceptable.

Additionally, natural gas prices are now more than 40% lower than a year ago, and crude oil prices have fallen by over 10%, indicating that deflationary pressure in the energy sector will persist. November data shows energy prices fell by 0.5% year-on-year.

Although the ECB tends to disregard temporary price swings caused by energy, some worry that excessively low inflation readings may affect inflation expectations, potentially making low inflation a self-fulfilling phenomenon.

The wait-and-see stance may persist

The latest inflation data supports the ECB’s decision to maintain current interest rate levels. The ECB cut rates by a total of 2 percentage points over the year ending this June, but has since adopted a wait-and-see stance. ECB officials generally believe that as long as underlying trends point to inflation returning to target, they can tolerate minor swings around the goal.

Market pricing also reflects this expectation. Currently, investors see only a very slim chance that the ECB will adjust its 2% deposit rate at the December 18 meeting.

Although the economy has not seen a boom, surveys and hard data continue to point to solid expansion close to its potential growth rate (about 1% to 1.5%). In addition, a relatively tight labor market is supporting economic growth. Another Eurostat report shows that the eurozone unemployment rate ticked up slightly to 6.4% in October.

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