Eurozone inflation rises, but downward trend expected to resume

The sharp pick-up in eurozone inflation in December was confirmed on Wednesday, according to final estimates from Eurostat, but forecasts suggests price pressures will ease significantly in the coming months – piling pressure on the European Central Bank to cut interest rates.

The harmonised index of consumer prices (HICP) rose 2.9% in December, up from 2.4% in November and matching the initial 'flash' figures released two weeks ago.

The increase, which was largely expected, was mainly due to a big rebound in energy inflation in Germany after one-off subsidies by the government affected the inflation rate in December 2022. Energy prices were down just 6.7% year-over-year in December, after an 11.5% decline in November.

The core rate of annual inflation, which strips out volatile items like food and energy, was in line with the flash figure at 3.4%, down from 3.6% the month before. As such, the acceleration in the headline rate is expected to be only temporary as core inflation continues its downward trend.

"The key question in the near-term is whether inflation in January and February will be soft enough to persuade the ECB to cut interest rates in March, when the central bank almost certainly will reduce its inflation and growth forecasts further. We think it will," said Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics.

The economic research consultancy is forecasting headline inflation dropping significantly to 2.2% in January and to 1.7% in February.

"It is the prospect of below-target inflation on the eve of the March meeting that we think will shift the council. The flash February HICP comes out in the week before the ECB’s March meeting, after the cut-off date for the Q1 forecasts, but in plenty of time to swing the council, all the same."

In an interview with Bloomberg News on Wednesday, ECB president Christine Lagarde appeared to indicate that the central bank would start cutting rates by the summer, but acknowledged that it's her job to be more "reserved" than other policymakers.