Euro area inflation fall: too good to be true?

Euro area (flash) headline inflation fell surprisingly strong to 2.4% yoy in November, the lowest reading since July 2021. Quite noteworthy, the 0.8 pp inflation drop was not only due to food and energy price effects but also based on significantly lower services and goods price inflation. So will inflation very soon be back to the ECB's 2% target? 

We caution to become too optimistic on inflation. First, energy prices will become less disinflationary as base effects from oil prices have run their course. Second, wage growth remains strong as negotiated wages soared by a record 4.7% yoy in Q3 and in 2024 wage negotiations are likely to keep advances elevated. 

While we continue to see inflation on a downtrend we look for a rebound of the headline number in the first quarter of 2024. Underlying inflation of currently 3.6% yoy is set to stay clearly above the 2% threshold and only fall to around 2 1/2% by year-end. Against this backdrop we hesitate to follow markets and to anticipate the first rate cut in April 2024 but continue to look for the start of the easing cycle by June only.