Eurozone inflation rises to 2.9% in December

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Eurozone inflation rose to 2.9 per cent in December, reversing six months of consecutive falls and raising questions over how soon the European Central Bank would start cutting interest rates.

The annual rise in December of consumer prices in the 20 countries that share the euro was up from a more than two-year low of 2.4 per cent the previous month, but was slightly lower than the 3 per cent rate forecast by economists in a Reuters poll.

The reduction of government subsidies on gas, electricity and food that began last year has triggered a re-acceleration of annual inflation in much of Europe. This has led investors to scale back their bets that the ECB will start rate cuts as early as March, putting a dent in a recent rally in bond markets.

But most economists believe eurozone inflation will soon start to fall again. Capital Economics’ Jack Allen-Reynolds said December’s pick-up in price pressures was “just a blip”, forecasting it would “be reversed in January due to further declines in food and core inflation”.

Core inflation, which excludes volatile energy and food prices to give a better picture of underlying price pressures, slowed from 3.6 per cent in November to 3.4 per cent in December. Services inflation, which is closely tracked by the ECB to see the impact of rising wages, was flat at 4 per cent.

The ECB, which is due to meet to discuss monetary policy on January 25, pushed back against investor expectations of imminent rate cuts last month, saying it wanted to see signs of wage pressures cooling to be sure inflation was on track to hit its 2 per cent target.

A mild sell-off in eurozone government bond markets continued in response to Friday’s figures. Germany’s rate-sensitive two-year bond yield was up 0.08 percentage points at 2.62 per cent. Bond yields rise as their prices fall.

Bert Colijn, an economist at Dutch bank ING, said “some new inflationary concerns are surfacing” including disruption to shipping in the Red Sea after attacks by Houthi militants and the swifter withdrawal of German government subsidies. But the underlying inflationary trend remained “relatively benign”, he added, predicting it would drop to the ECB’s 2 per cent target by the end of this year.

December’s pick-up in inflation reflected a comparison with a year earlier when several governments — including those in Germany and France — were heavily subsidising gas, electricity and food costs with measures they have since started to withdraw. 

Reflecting this shift, energy prices were down 6.7 per cent across the eurozone in December, compared with an annual decline of 11.5 per cent in the previous month, according to the harmonised index of consumer prices published by Eurostat on Friday.

Fresh food prices accelerated, rising 6.7 per cent compared with 6.3 per cent in the previous month. However, goods inflation slowed to 2.5 per cent, while price growth for processed food, alcohol and tobacco also slowed to 5.9 per cent.

Sylvia Ardagna, an economist at UK bank Barclays, said the fact that consumer prices rose only 0.2 per cent from the previous month indicated the ECB was still on track to hit its target soon.

“These numbers should continue to provide comfort to the ECB that the restrictive monetary policy stance is being transmitted forcefully,” she said, predicting a rate cut in April.