Inflation across the eurozone rose in December after an increase in energy costs, reversing six months of consecutive falls and easing the pressure on the European Central Bank (ECB) to cut interest rates.
Figures from the EU statistical agency Eurostat showed consumer prices across the 20-country bloc rose at an annual rate of 2.9% last month, up from 2.4% in November. Economists polled by Reuters had forecast a slightly higher reading of 3% for December.
The increase in the headline rate comes after the end of government support for utility costs, alongside a smaller annual decline in energy prices in December than in November connected to last year’s one-off subsidy in Germany.
In the flash estimate for December, inflation in food, alcohol and tobacco prices continued to moderate, easing some of the pressure on households across the bloc as the rate across those categories dipped from 6.9% in November to 6.1% last month.
The figures come amid speculation the ECB will begin cutting interest rates within months amid a worsening economic slowdown across the eurozone, having increased borrowing costs to the highest level since the launch of the euro.
Financial markets widely expect the world’s largest central banks to slash interest rates this year as inflation falls back after the shock from the Covid pandemic and Russia’s war in Ukraine, while there are growing fears of recession in several advanced economies.
Economists said December’s inflation data was unlikely to dramatically shift the timing of the ECB’s first cut in interest rates because an increase in the headline rate had been widely expected after energy support schemes expired.
“Some investors will undoubtedly be concerned that this spike in inflation may put the ECB off cutting interest rates sooner rather than later,” said Michael Field, the European market strategist at Morningstar.
“However, central bankers were always aware of the potential for this spike in inflation, thus it shouldn’t factor in on their decision-making process. All eyes are on next month’s inflation release, and whether we can get back to that all-important downward trend.”
Financial markets are betting the ECB will cut rates six times this year, with the first move coming as early as the spring. However, the central bank’s president, Christine Lagarde, has warned it remains too early to “start declaring victory” over inflation, while arguing that rates would need to remain high for a lengthy period to ensure inflation falls back to its 2% target.
Jack Allen-Reynolds, the deputy chief eurozone economist at the consultancy Capital Economics, said the jump in December was “just a blip” and that inflation across the 20-nation bloc would probably continue to fall over the coming months.
“Past declines in food producer prices have not yet fully fed through to consumer prices. Core goods inflation should keep falling as the impact of improved global supply conditions and lower energy prices continues to be felt.”
