Higher-than-expected inflation in the Euro zone rises to 2%, weakening the argument for a jumbo rate cut.

• The inflation rate in the euro area increased from 1.7% to 2% in October, according to flash figures released on Thursday, which was slightly higher than the predicted 1.9%.
• Core inflation and services inflation were both unchanged on the previous month.
• The European Central Bank is predicted to reduce interest rates by 25 basis points in December, according to market expectations. One analyst believes that the latest data will put an end to the debate about whether a larger 50-basis-point reduction is necessary.

Eurostat released preliminary figures on Thursday showing that inflation in the 20-nation euro zone rose to 2% in October.

Reuters polled economists who forecast a 1.9% headline figure for September. However, the reading was revised down to 1.7% on Oct. 17, below market expectations.

The rate of price increases for food, alcohol, and tobacco products saw the most significant increase, jumping from 2.4% to 2.9%.

The core inflation rate, excluding volatile components and energy prices, remained unchanged at 2.7%, slightly higher than the anticipated 2.6%. Additionally, services inflation, a crucial indicator of domestic price pressures, also remained steady at 3.9%.

The euro rose 0.15% against the U.S. dollar after the release, reaching a two-week high of $1.087.

Whether the European Central Bank will implement a jumbo half-percentage-point cut in interest rates at its next meeting in December can be determined by examining the fresh Thursday inflation print.

This year, the central bank has reduced its key rate from 4% to 3.25% by making three quarter-point increments.

Markets are currently pricing another 25-basis-point reduction in December.

Euro zone growth

Despite analysts predicting further weakness ahead, traders are taking into account the latest growth figures for the euro area, which showed better-than-expected 0.4% expansion in the third quarter.

During its October meeting, the ECB stated that the disinflation process was progressing smoothly and that the slowdown in the euro zone's economic activity had boosted its confidence that inflation would not experience a sudden spike.

"Betting on a 50 basis point cut in interest rates is wiped out due to hotter eurozone inflation, stronger growth, and record low unemployment, according to Kyle Chapman, foreign exchange market analyst at Ballinger Group," Chapman stated in a note.

While an increase in consumer price growth was predicted for the end of the year, services inflation remained stubbornly unchanged.

The concern of a potential tipping point in the labor market, which could lead to a sharp unwind in labor hoarding if consumption worsens, is no longer significant, as evidenced by this week's growth and employment figures, according to Chapman.

"The best approach is to make consecutive 25 basis point moves. The requirement for below-neutral rates to revive a shrinking eurozone economy is diminishing, which means there's no need to rush the easing process, especially since services inflation is having trouble breaking free."