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The latest eurozone inflation data points to ongoing disinflationary forces, supporting arguments for the European Central Bank (ECB) to cut interest rates in December. In November, consumer prices fell by 0.3% from October, the sharpest monthly decline since January 2024. Energy prices, a significant inflation driver, remained 1.9% lower year-on-year but showed a modest 0.6% monthly increase.

Core inflation, excluding energy and food, rose slightly to 2.8% year-on-year in November, up from 2.7% in October. However, monthly core inflation dropped by 0.4%, while services prices—a persistent inflation component—declined 0.9% compared to October. These trends indicate easing underlying price pressures, potentially paving the way for further ECB rate cuts.

Economic activity across the eurozone continues to weaken. November’s Composite Purchasing Managers’ Index (PMI) dropped to 48.1, signaling the sharpest contraction in private sector activity since January. Both manufacturing and services sectors contracted, with the services PMI slipping to 49.2, marking its first contraction in 10 months.

“The market expects a 25 basis-point rate cut in December, particularly after hawkish commentary ruled out larger cuts,” said Kyle Chapman, forex analyst at Ballinger Group.

Germany’s Retail Sales Slump Highlights Regional Fragility

Germany, the eurozone’s largest economy, reported a significant drop in retail sales, signaling broader economic challenges. Retail sales fell 1.5% month-on-month in October, the steepest decline in two years, following a revised 1.6% increase in September. The October figure far exceeded market expectations of a 0.3% drop, underscoring deteriorating consumer sentiment.

The weak retail data aligns with broader concerns about Germany’s economic outlook. Despite these signs of fragility, financial markets remained steady. The euro traded at $1.0560 against the US dollar, and eurozone sovereign bond yields were unchanged. Germany’s 10-year Bund yield hovered at 2.12%, its lowest in two months.

Equity markets showed little movement, with the Euro STOXX 50 index flat after a slight rise on Thursday. Among major stocks, Airbus SE gained 1.3%, Schneider Electric SE rose 1%, and LVMH advanced 0.6%, while Telefonica and Banco Santander posted declines of 1.5% and 1.2%, respectively.

While inflation trends provide hope for rate cuts, challenges like Germany’s retail downturn and declining economic activity suggest a cautious outlook for the eurozone. The ECB faces a delicate balance as it navigates these pressures in the coming months.