Eurozone inflation jumps as oil prices recover

Eurozone inflation rose in December, boosted primarily by higher energy costs, official data showed on Tuesday.

According to a flash estimate from Eurostat, the European Union’s statistics office, annual inflation in December is expected to be 1.3%, up from 1.0% in November and in line with consensus.

Food, alcohol and tobacco recorded the highest annual rate, at 2.0% compared to 1.9% in November. But there was also a notable recovery in energy, ahead 0.2% compared to a 3.2% collapse in November, as oil prices improved.

Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, said: "This jump is consistent with the shift in base effects from last year’s collapse in oil prices, and won’t surprise anyone.

"The key story, though, is that the energy CPI rate still looks too subdued compared to the trend in oil prices, not least given the recent increase on the back of rising geopolitical risks.

"We suspect that services inflation will fall a bit further in the near term, driving core inflation back down to 1.2% in the first quarter, but we suspect that it will eventually rebound (not factoring in the usually volatile Easter effects), averaging around 1.3% through the year as whole."

In a note, Oxford Economics argued: "Inflation in the euro area has been, and continues to be persistent headache for the European Central Bank. And while the headline figure gives the ECB some breathing room, we still remain wary that a major breakthrough in core inflation will take place this year. Demand prospects in the Eurozone economy remain soft, limiting firms’ pricing power, while wage growth looks to have peaking with tightness in the labour market showing signs of abating.

"We therefore forecast core inflation to continue to hover around its current level in 2020 and remaining well below the ECB’s inflation target."

Bert Colijn, senior eurozone economist at ING, wrote: "While the higher core inflation reading will be on the ECB’s radar, continued sluggish growth and subsiding wage pressures make a quick rise to the 1.5-2% range an upside risk scenario, rather than a base case. Without material improvement in business confidence and the growth outlook, continued modest price growth seems the most likely scenario for the moment."

Retail sales volumes rose in November, meanwhile, by 1.0% in the eurozone, Eurostat also said on Tuesday. That took the year-on-year rate to 2.2% from a revised 1.7% in October. Across the wider 28 member states, the month-on-month volume of retail trade rose 0.6% and 1.9% compared to November 2018.

Within individual countries, Germany saw a 2.1% month-on-month jump, while the UK reported a 1.7% decline.

Pantheon Economics’ Vistesen said he would take the retail data "with a pinch of salt", however. "Outliers in the German data are usually revised, and we also suspect that Black Friday sales boosted the November headline at the expense of what likely was a decline in December.

"This story carries over to the rest of the eurozone, which is why we’ll wait to pass judgement on consumption in the fourth quarter until we have seen the December data. We are not getting our hopes up."