The Matchstick of Inflation

During 2024, inflation in both the U.S. and the eurozone stabilized its decline below 4% and toward 2%. Coming from the alarming levels of 2022—close to or exceeding 10%—this decline fostered the notion that the post-pandemic inflationary episode had been successfully resolved. This optimism encouraged a reduction in interest rates, which many now hope will continue, albeit with no clear endpoint in sight.

However, the average inflation rate in the second half of 2024 was 2.7% in the U.S. and 2.2% in the eurozone. Moreover, inflation rose month-on-month during the last three months of the year, reaching 2.9% in the U.S. and 2.4% in the eurozone by year-end.

The average of the last three seasonally adjusted monthly inflation rates stood at 0.3% in the U.S. and 0.21% in the eurozone, corresponding to annualized inflation rates of 3.7% and 2.6%, respectively. If the goal is a stable 2% inflation rate, we are not there yet.

The latest U.S. inflation figures have reignited expectations of lower interest rates and driven further stock market rallies. However, these expectations are weakly justified, as they depend on a slowdown in price growth excluding food and energy as well as on the fact that the overall index increase was less than anticipated.

The situation differs between the U.S. and the eurozone. In the latter, inflation is lower, the growth rate of the real economy is lower and decreasing, fiscal policies are expected to be less expansionary, and the potential inflationary impact of Trump's threatened tariffs is smaller. Therefore, the rapid conclusion of the inflation rollback is more uncertain in the U.S.