Euro area annual inflation rose to 2.4 percent in December 2024, in line with the consensus and up from 2.2 percent in November, reflecting a modest uptick in price pressures.

Services led the inflation surge with an annual rate of 4.0 percent, slightly higher than November's 3.9 percent, highlighting persistent cost pressures in labour-intensive sectors. The core rates, as well as food, alcohol, and tobacco prices remained steady at 2.7 percent, maintaining their contribution to inflation. Non-energy industrial goods inflation softened marginally to 0.5 percent from 0.6 percent in November. Energy prices, however, reversed their deflationary trend, edging up by 0.1 percent in December after a minus 2.0 percent decline in November, signalling early signs of recovery in the energy sector.

Regionally, headline inflation rose only slightly in France (1.8 percent after 1.7 percent) but much more sharply in Spain (2.8 percent after 2.4 percent) and Germany (2.8 percent after 2.4 percent). However, inflation fell in Italy (1.4 percent after 1.5 percent).

In essence, while core inflation and food inflation remain elevated, the stabilisation of energy prices suggests easing cost pressures in some areas. The latest update takes the RPI to minus 8 and minus 10. This means that economic activities are generally within the euro area's market expectations.

Eurozone headline inflation is seen up 2.4 percent and core up 2.7 percent in the latest month versus 2.2 percent and 2.7 percent a month ago.

The flash harmonised index of consumer prices (HICP) provides an early estimate of the final HICP, but using just partial data. Changes in the index provide an estimate of inflation, as targeted by the European Central Bank (ECB). Final data are released a round two weeks later. 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. Two of these are made available in the flash report amongst which financial markets normally concentrate upon the narrowest which excludes energy, food, alcohol and tobacco.

The measure of choice in the Eurozone is the harmonized index of consumer prices (HICP) 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 Eurozone, 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.