Euro-zone inflation fell more-than-expected in December on lower energy prices, ending a two-month period at double-digit rates as economic sentiment improved across the single-currency bloc.
The flash index released by Eurostat on Friday showed consumer prices rose at an annual rate of 9.2 percent in December, compared with 10.1 percent in the previous month and a record annual rate of 10.6 percent in October. Annual inflation rates ranged from 20.7 percent in Latvia to 5.6 percent in Spain. The decline in the average rate across the bloc topped expectations for a fall to 9.5 percent in a Bloomberg poll of economists.
“The fall in inflation and the improvement in economic sentiment in December suggest that stagflation in the eurozone is not as acute as feared a few months ago,” said Andrew Kenningham, chief economist for Europe at consultancy Capital Economics.
However, barring more volatile food and energy prices, which fell sharply in December, core inflation still rose to a new high of 5.2 percent, beating economists’ expectations for the figure to rise from the 5.0 percent recorded in November percent would remain. In December alone, core prices rose by 0.6 percent.
In December, Eurostat’s estimate of annual energy price inflation was 25.7 percent, well below November’s rate of 34.9 percent, while the rate of inflation for non-energy services and industrial goods was slightly higher.
The rise in annual core inflation highlighted policymakers’ concerns that lower petrol, gas and electricity costs would lower the headline rate without addressing underlying inflationary pressures.
As core prices rise by more than double the European Central Bank’s 2 percent inflation target, Philip Rush, founder of consulting firm Heteronomics, said: “Inflation will not be able to sustainably return to target until this core problem is overcome.”
François Villeroy de Galhau, the governor of France’s central bank, said on Thursday that the ECB needs to raise interest rates further to counter underlying price pressures.
He said the monetary tightening program was likely to end by the summer, but didn’t say how far he thinks interest rates need to rise from the current 2 percent. The financial markets are expecting a top interest rate of around 3.5 percent in the euro zone.
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The ECB has signaled its intention to hike interest rates by 0.5 percentage point at both its February and March meetings, with next steps likely to be guided by incoming data on core inflationary pressures and the extent of a European economic slowdown.
Bert Colijn, senior eurozone economist at ING, said: “With energy inflation falling rapidly and energy supply forecasts improving by 2 per cent [headline inflation] could be achieved much sooner than expected. Nonetheless, the ECB’s rising core inflation will be enough to further increase by 0.5 percentage points in February and March.”
The latest economic sentiment indicator suggested the euro area was doing better than fears, with prices falling 0.3 percent in December after energy prices fell 6.5 percent.
The index rose 1.8 percentage points to 95.8 percent of the long-term average for the indicator of 100. Employment expectations were broadly stable in December, well above the long-term average.
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