Eurozone inflation rose in December , but less than expected, which may fuel further speculation that the European Central Bank could soon signal its readiness to cut interest rates.
The bloc's consumer price index rose by 2.9% year-on-year from 2.4% in November, according to preliminary data published on Friday (05.01.2024) by the European Union's statistics office Eurostat.
Inflation fell for five months in a row
Although inflation was expected to rebound, it was lower than economists expected in The Wall Street Journal survey, with prices rising 3.0% year-on-year. Inflation fell for five consecutive months through November.
Meanwhile, core inflation, which excludes volatile energy, food, alcohol and tobacco prices and is monitored as a reflection of underlying inflation trends, fell to 3.4% in December from 3.6% in November. The figure was again below consensus, at 3.5%.
The data could lead to earlier rate cuts
Softer-than-expected headline and core inflation data could lead to calls for an earlier rate cut by the ECB, amid stronger disinflationary signals and that the rate will soon move closer to the central bank's 2% target. According to Eurostat data released on Friday, industrial producer prices fell by 0.3% in November, another signal of easing price pressures.
According to Refinitiv's data, money markets are pricing in the first 25 basis point rate cut in April. The ECB left key deposit rates unchanged at 4.0% at its last meeting in December.
Recovery in inflation due to energy costs
The December rebound in headline inflation was mainly driven by energy costs, which fell at a much slower pace in December than in November. Energy prices fell 6.7% year-on-year in December from 11.5% in the previous month, Eurostat said, likely driven by the base effects of German government aid introduced at the end of 2022 that lowered gas and heating bills in Europe's largest economy.
Based on the EU harmonised measure, inflation in Germany jumped to 3.8% from 2.3%, while it rose to 4.1% from 3.9% in France, fell to 0.5% from 0.6% in Italy and stagnated at 3.3% in Spain. .
Food, alcohol and tobacco were significantly higher
Food, alcohol and tobacco inflation across the bloc was still well above the headline rate, but still cooled to 6.1% from 6.9% in November.
However, most of December's rise in headline inflation will be reversed in January due to further declines in food and core inflation, Jack Allen-Reynolds, deputy chief eurozone economist at Capital Economics, said in a research note.
"Although ECB policymakers currently insist that interest rates will remain high for some time, we still suspect that they will start cutting interest rates in or around April," he added.