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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 of consumer prices in the 20 countries that share the euro in December 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. December’s pick-up in price pressures was “just a blip”, said Capital Economics’ Jack Allen-Reynolds, forecasting it would “be reversed in January due to further declines in food and core inflation”.
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 0.05 percentage points at 2.59 per cent. Bond yields rise as their prices fall.
Diego Iscaro, an economist at S&P Global Market Intelligence, said: “We still believe that market expectations of a first cut coming in March may be too early, as the ECB will want to have more evidence of a moderation in wages before pulling the trigger.”
Eurozone energy prices fell 6.7 per cent in the year to 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 in December, rising 6.7 per cent compared with 6.3 per cent in the previous month.
The pick-up in inflation reflected the comparison with a year earlier when several governments — including those in Germany and France — heavily subsidised gas, electricity and food costs, which drove down the cost of household bills temporarily.
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.
Source: Economy - ft.com
