Eurozone inflation tumble pits the ECB against markets. Inflation in the Eurozone fell more than expected for the third consecutive month in November, challenging the European Central Bank’s claim that price increases are intractable. Meanwhile, betting on an early spring rate reduction was fueled despite the bank explicitly guiding against lower interest rates.

Although it has rapidly decreased toward the European Central Bank’s objective of 2% from levels just a year ago, officials have cautioned against becoming overly optimistic. It is possible that the “last mile” of disinflation will be more challenging and may take twice as much time as reducing inflation back below 3%.

Even though a rebound in the coming months is still possible, the fact that high energy costs are being knocked out of year-earlier results and certain tax breaks are being reversed looks to be testing that forecast. Hard data showing inflation decreasing considerably quicker than predicted appears to undermine that prognosis.

As a result of practically all categories, except for unprocessed food costs, consumer price rise in the twenty countries that use the euro currency decreased to 2.4% in November from 2.9% in October. This figure is significantly lower than the estimates of 2.7%.

Even the fundamental pricing pressures decreased more rapidly than anticipated, with inflation excluding food and energy, which is regularly monitored by the European Central Bank, falling to 3.6% from 4.2% due to a significant decrease in services costs.

The European Central Bank (ECB) and investors appear to anticipate quite different futures for consumer prices and interest rates, putting them on a collision course. The sharp reduction in inflation puts the eurozone’s central bank and investors in a precarious position.

“With a third month of an unambiguously good inflation report and with prices actually declining from the previous month, it is starting to look like before long we will be talking about inflation being too low rather than too high,” said Kamil Kovar, a senior economist at Moody’s Analytics. “This is a very encouraging sign.”

“And if the recent trends in inflation and growth continue, then 2024 will be the year when the ECB implements a pirouette in monetary policy.”

As a result of nominal solid wage growth, the European Central Bank (ECB) contends that the underlying dynamics are more obstinate than they appear to be and that inflation will return to levels over 3% the following year, with the objective of 2% not being reached until late 2025.

The bank will be required to maintain its deposit rate at a record-high 4% for a lengthy period as a result of this, and even Yannis Stournaras, the dovish president of the Greek central bank, does not anticipate a reduction in the rate until the middle of 2024.

This argument would appear to be supported by recent data released on Thursday, which showed that unemployment remained at a record low of 6.5% despite an economic downturn. This data highlights how tight the labor market is in the eurozone’s member states.

Fabio Panetta, the Governor of the Bank of Italy, did not directly challenge the European Central Bank’s (ECB) advice on Thursday. Still, he did warn about the risks associated with maintaining high interest rates for an extended period.

“The duration of this phase will depend on developments in macroeconomic variables; it could be short if continued weakness in economic activity accelerates the decline in inflation,” said Panetta, who previously served on the ECB board. To prevent unwarranted harm to economic activity, we must take precautions.

Investors are progressively disregarding the specific direction that European Central Bank President Christine Lagarde has provided for maintaining stable interest rates for several quarters. As a result, we are pricing 115 basis points of rate reduction for the following year, with a first move by April already wholly priced in.

The European Central Bank’s estimates have a poor track record, which is one of the primary reasons for the difference. Over the past several years, it has been compelled on multiple occasions to forsake its guidance after attempting to defy the market’s expectations.

All of these factors, which lead to fast disinflation, point to the fact that growth is less than the European Central Bank (ECB) anticipated, the labor market is deteriorating, and credit demand has gone.

“Also, there is still a lot more impact of tightening to come as interest payments are still increasing,” said Bert Colijn, an analyst on behalf of ING. Therefore, it is appropriate for the market to consider rate reductions for 2024. Before the summer arrives, we believe the first one may take place.

Since corporate profits—rather than salaries, as they are during typical periods of rapid inflation—are the primary driver of inflation, some economists contend that estimating the current inflation rate is extremely difficult.