European inflation is falling faster than the European Central Bank had expected, slowing to a 2.4% annual pace in November after peaking at 10.6% in October 2022. The central bank will struggle to insist on its “higher for longer” interest-rate stance if the euro-area economy continues to weaken even as consumer price increases ebb.
Significantly, German inflation has declined to 2.3%, the slowest pace for two and a half years. The ECB’s 2% target is in sight, suggesting the punitive monetary-tightening medicine of the past 18 months is working — perhaps too well. Germany’s manufacturing sector is struggling with a serious recession, and the economy shrank in the third quarter. To pile on the misery, there’s no easy way for the state to help: Prime Minister Olaf Scholz’s fragile coalition now has to grapple with a large hole in its budget plans after the nation’s constitutional court ruled against the government’s use of special funds.
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