Eurozone inflation rose to 2.9% in December according to Eurostat

Food, alcohol and tobacco were expected to continue with the highest inflation rate in December (6.1%, compared with 6.9% in November), followed by services (4.0%, stable compared with November). But a diminution in energy inflation abated from -11.5% in November to -6.7% in December.

The news is likely to damp hopes of an early interest rate decrease by the European Central Bank in 2024. The bank’s rate stands unchanged from last October at 4%, following steady increases which began in July 2022.

Christine Lagarde, the president of the ECB, voiced concerns late last year that she expected inflation to rise again as subsidies on energy prices were removed. She said last November that it won’t be before the “next couple of quarters” that the ECB will start to cut rates.

Zsolt Darvas, a senior fellow at the Brussels-based think-tank Bruegel, said the rise was in line with expectations since energy prices “very much influence the overall headline inflation rate e-books.”

Of so-called core inflation – which excludes food and energy prices – Darvas said “the important news is that there was a marginal, a very small decline”, from 3.6% in November to 3.4% in December.

“I think this is the more important news because this reflects the underlying developments of inflation. So it could be that headline inflation might rise a little bit in the coming months. But what the ECB policymakers watch for is how the core inflation will evolve.”

However, Darvas pointed out that the 3.4% core inflation rate remains adrift of the ECB’s 2% inflation target of the European Central Bank.

With wage growth accelerating and inflation broadly slowing, consumer purchasing power is increasing, according to Darvas, which might imply demand pressure, in turn making higher inflation stubborn.

“That’s why I would expect that the ECB will not stop cutting interest rates anytime soon,” Darvas said, adding: “My expectation is that the European Central Bank will keep its current interest rates for many, many additional months because core inflation is still well above the target of 2%.”

Darvas also pointed to escalation of the Middle East conflict as a risk particularly for global global oil and energy prices. Such an escalation “would have an impact all around the world, including in Europe and the eurozone. And that could keep inflation pressure higher for longer.”