The euro area annual inflation rate edged up to 2.4 percent in December 2024 in line with the consensus and slightly higher than November's 2.2 percent but lower than 2.9 percent recorded in December 2023. This marks a deceleration in price growth compared to the previous year but indicates a modest increase in recent months.

Services played a dominant role in driving inflation, contributing 1.78 percentage points (pp) to the annual rate. This highlights the persistent price pressures in labour-intensive sectors, possibly reflecting rising wage costs or elevated demand. Food, alcohol, and tobacco also made a significant contribution of 0.51 pp, underscoring the impact of supply chain dynamics and seasonal demand, especially during the festive period. Non-energy industrial goods added 0.13 pp, a likely reflection of stable but restrained consumer demand for manufactured products. Notably, energy's contribution was minimal (0.01 pp), signalling a stabilisation in energy prices, which contrasts sharply with its earlier role as a major inflationary driver.

Regionally, headline inflation rose in France (1.8 percent after 1.7 percent), Spain (2.8 percent after 2.4 percent), and Germany (2.8 percent after 2.4 percent), but fell in Italy (1.4 after 1.5 percent). Inflation rates in France and Italy remain below the European Central Bank's target, while Germany and Spain exceed it.

Overall, December 2024's inflation figures reflect a shift from energy-driven pressures to service-sector dominance, with subdued contributions from other categories. The latest figures take the euro area RPI to minus 29 and the RPI-P to minus 59. This means that economic activities are generally lagging behind market expectations.

Forecasts call for HICP up 2.4 percent on year and narrow core up 2.8 percent.

The harmonised index of consumer prices (HICP) is a measure of consumer prices used to calculate inflation on a consistent basis across the European Union. Changes in the index provide an estimate of inflation, as targeted by the European Central Bank (ECB). Eurostat provides statistics for the EU and Eurozone aggregates, individual member states and for the major subsectors. Over the short-term, the central bank focusses on a number of core measures which seek to strip out the most volatile components and so give a much better guide to underlying developments. Amongst these, financial markets normally concentrate upon the narrowest gauge which excludes energy, food, alcohol and tobacco.

The measure of choice in the European Monetary Union (EMU) is the harmonized index of consumer prices which has been constructed to allow cross member state comparisons. An investor who understands how inflation influences the markets will benefit over those investors that do not understand the impact. In the European Monetary Union, where monetary policy decisions rest on the ECB's inflation target, the rate of inflation directly affects all interest rates charged to business and the consumer.

Inflation is an increase in the overall prices of goods and services. The relationship between inflation and interest rates is the key to understanding how indicators such as the CPI influence the markets - and your investments.

Inflation (along with various risks) basically explains how interest rates are set on everything from your mortgage and auto loans to Treasury bills, notes and bonds. As the rate of inflation changes and as expectations on inflation change, the markets adjust interest rates. The effect ripples across stocks, bonds, commodities, and your portfolio, often in a dramatic fashion.

By tracking inflation, whether high or low, rising or falling, investors can anticipate how different types of investments will perform. Over the long run, the bond market will rally (fall) when increases in the HICP are small (large). The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.