Inflation in the eurozone fell more than expected in December on the back of lower energy prices, ending a two-month period of double-digit rates as economic sentiment improved across the single currency bloc.
The flash index published by Eurostat on Friday showed consumer prices rose at an annual rate of 9.2 per cent in December, down from 10.1 per cent the previous month and a record annual rate of 10.6 per cent in October. Annual inflation rates ranged from 20.7 per cent in Latvia to 5.6 per cent in Spain. The drop in the average rate across the bloc exceeded expectations of a fall to 9.5 per cent in a Bloomberg poll of economists.
“The fall in inflation and improvement in economic sentiment in December suggest that the eurozone’s case of stagflation is not as acute as feared a few months ago,” said Andrew Kenningham, chief Europe economist at consultancy Capital Economics.
However, core inflation, excluding more volatile food and energy prices which fell sharply in December, still rose to a new high of 5.2 per cent, exceeding economists’ expectations that the figure would remain at the 5 per cent rate recorded in November. Core prices rose 0.6 per cent in December alone.
In December, Eurostat’s estimate of annual energy price inflation stood at 25.7 per cent, well below November’s rate of 34.9 per cent, while the rate of price growth of services and non-energy industrial goods edged higher.
The increase in annual core inflation highlighted policymakers’ fears that lower petrol, gas and electricity costs would bring down the headline rate without addressing underlying inflationary pressures.
With core prices rising at more than twice the European Central Bank’s 2 per cent inflation target, Philip Rush, founder of consultancy Heteronomics, said: “Inflation won’t be able to sustainably return to the target until this core problem is conquered.”
François Villeroy de Galhau, the French central bank governor, said on Thursday that the ECB would need to keep raising interest rates to address underlying price pressures.
He said the programme of monetary tightening would probably end by the summer, but did not say how much further he thought interest rates needed to rise from the current 2 per cent rate. Financial markets expect a peak in eurozone interest rates of roughly 3.5 per cent.
The ECB has signalled its intention to raise rates by 0.5 percentage points both at its February and March meetings with moves after that likely to be guided by the incoming data on core inflationary pressures and the extent of a European economic downturn.
Bert Colijn, senior eurozone economist at ING, said: “With energy inflation dropping quickly and energy supply forecasts improving, 2 per cent [headline inflation] could be reached much sooner than expected. Still, rising core inflation will be enough for the ECB to continue to hike by 0.5 percentage points in February and March.”
The latest economic sentiment indicator suggested the euro area was faring better than feared, with prices falling 0.3 per cent in the month of December on the back of a 6.5 per cent drop in energy prices.
The index showed a rise of 1.8 percentage points to 95.8 per cent of the long-term average for the indicator of 100. Employment expectations were broadly stable in December and well above the long-term average.