Inflation across the euro zone slowed in line with expectations at the end of last year, reaching the European Central Bank’s 2% target and setting the stage for potential undershooting in 2026.

Latest figures from Eurostat show that headline inflation eased to 2% in December, down slightly from 2.1% the previous month. The outcome matched economist forecasts and reflected the continued impact of lower energy costs, which offset renewed upward pressure on food prices.

Measures of underlying inflation also showed modest improvement. Core inflation, which strips out volatile food and energy components, dipped to 2.3% from 2.4%. This was driven by a slowdown in price growth across services and industrial goods, both of which had been contributing to persistent inflationary pressure earlier in the year.

Throughout 2025, inflation hovered around the ECB’s target, with periods both above and below 2%. While the central bank expects inflation to remain close to this level over the medium term, projections suggest that readings could fall under target for much of this year and into next.

Some policymakers have voiced concern that prolonged low inflation could weaken wage growth and embed subdued price expectations. However, the prevailing view within the ECB appears more measured, with recent softness largely attributed to energy price movements rather than underlying economic weakness.

Professor Joe Nellis, economic advisor at Baker Tilly Ireland, has suggested that the ECB is unlikely to reduce interest rates further unless the euro zone experiences a significant economic downturn. In his view, borrowing costs are likely to remain stable over the coming months.

He also noted that geopolitical developments, including potential changes in global energy supply linked to Venezuela, could influence price dynamics later in the year.

The ECB signalled in December that it was not inclined to make immediate policy changes, reinforcing market expectations that its 2% deposit rate will be maintained throughout 2026. Nonetheless, a sustained move well below target could reopen discussions around easing, particularly if it points to a longer-term inflation shortfall.

Looking ahead, the inflation outlook remains finely balanced. Lower energy prices, a strong euro, increased imports from China and easing wage growth could exert downward pressure. At the same time, higher defence spending, fiscal expansion in Germany, tight labour markets and ongoing geopolitical tensions may push prices higher.

These competing forces add to uncertainty and limit the ECB’s ability to provide guidance beyond the short term. While further rate cuts are not being actively signalled, they remain a possibility if conditions shift materially. The ECB’s next policy meeting is scheduled for 5 February.

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