Eurozone Inflation Accelerates Less Than Expected

(RTTNews) - Euro area consumer price inflation rose in December, mainly due to the energy-related base effects, while the core measure remained strong despite slowing slightly, underpinning the European Central Bank's policy stance that it is too early to think of interest rate cuts as there is more work to be done to bring price growth to the 2.0 percent target. UNDERLYING INFLATION REMAINS STRONG The consumer price index, or CPI, rose 2.9 percent year-on-year following a 2.4 percent increase in November, preliminary estimates from the statistical office Eurostat showed Friday. Economists had forecast 3.0 percent inflation. Core inflation, which excludes prices of energy, food, and alcohol and tobacco, slowed to 3.4 percent from 3.6 percent. Economists had expected the figure to ease to 3.5 percent. Compared to the previous month, Eurozone consumer prices rose 0.2 percent in December. Prices of food, alcohol & tobacco rose 6.1 percent year-on-year after a 6.9 percent gain in the previous month. Services inflation was stable at 4.0 percent. Energy prices decreased 6.7 percent from a year ago, following an 11.5 percent decline in November. Prices of non-energy industrial goods rose 2.5 percent after a 2.9 percent growth in the previous month.

Figures out of Germany and France this week also revealed similar trends for inflation.

Eurostat is set to release the full data on December inflation on January 17. ECONOMISTS' VIEW

Capital Economics economist Jack Allen-Reynolds expects most of December's increase in headline inflation to be reversed in January due to further declines in food and core inflation, and both headline and core measure to have downward trends through out the year.

"Accordingly, while 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," the economist added.

Commerzbank economist Christoph Weil said the ECB is likely to cut its key interest rates significantly less than the market currently expects.

Market expectations of 150 basis points of cuts by the end of the year are clearly overdone, Weil said. Commerzbank expects only 75 basis points of cuts.

ING economist Bert Colijn said the latest increase in headline inflation serves as a reminder that interest rate cuts in the first quarter are unlikely but expectations of cuts later in the year cannot be dispelled. "...recent market expectations of a first-quarter hike are premature, but don't think that we're back to 'higher for longer' either," Colijn said. "We expect the ECB to start cautiously cutting rates from June onwards, with 75bp in total for 2024."