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Euro zone inflation falls sharply in December but offers ECB little respite

By January 9, 2023No Comments

Euro zone inflation fell by more than expected last month but underlying price pressures rose, making it likely the European Central Bank will continue raising interest rates for months to come.

Consumer price growth in the bloc that expanded to 20 nations when Croatia joined on 1 January, slowed to 9.2% in December from 10.1% a month earlier.

This was below forecasts of 9.7% in a Reuters poll, data from Eurostat showed today.

But this seemingly good news masked a more malignant trend as the biggest chunk of the decline came from lower energy prices while all key components of core inflation accelerated.

Today’s Eurostat figures show that when measured by the Harmonised Index of Consumer Prices, Ireland’s inflation rate is estimated to come at 8.2% in December, down from 9% in November.

Energy inflation in Ireland slowed to an annual rate of 34.3% in December, compared to an annual rate of 43% in November. Energy prices fell by 6.5% in the month of December, the CSO said.

Minister for Finance Michael McGrath has said that the rate of inflation in Ireland has peaked, and is on a downward trajectory.

Speaking on RTÉ’s News At One, Mr McGrath said that despite inflation staying over 8%, the rate of price increases is expected to ease.

“It is our view now that inflation has actually peaked and is now on a downward trajectory,” he said.

“There is always, of course, the caveat of another energy price shock, for example associated with the war, but based on the information that we have at this point in time, we do believe that inflation has now peaked and is on the way down here in Ireland.

“We do believe that this downward trajectory with inflation will continue and will actually accelerate, particularly in quarter two and quarter three of this year, so that is good news.

Today’s figures show that euro zone inflation – excluding volatile food and energy prices – picked up to 6.9% from 6.6% while an even narrower measure that also excludes alcohol and tobacco prices rose to 5.2% from 5%.

But energy inflation has fallen from an annual rate of 34.9% in November to 25.7% in December.

Services and non-energy industrial goods inflation, both watched closely by the ECB to gauge the durability of price growth, accelerated, adding to concerns that price growth is more stubborn than feared.

Another worry is that headline inflation may have dipped on a host of one-off or temporary measures, including government subsidie.

Some of this could be reversed in January, when inflation could accelerate once again.

But even if price volatility is set to be high over the coming months, inflation has likely peaked and the real issue is just how quickly it will fall back towards the ECB’s 2% target.

The problem is that the longer price growth stays high, the more difficult it will be to tame it as firms start adapting their pricing and wage policies, perpetuating inflation.

That is why the ECB raised rates by a combined 2.5 percentage points last year – mirroring its global peers, even if somewhat later.

The ECB has also promised big hikes in both February and March in what is already the most aggressive policy tightening cycle in its history.

But even so, inflation will not return to 2% until the second half of 2025, according to the ECB’s own projections, which have proven excessively optimistic over the past two years, suggesting that risks are skewed towards a slower disinflationary process.

Markets and surveys are both starting to factor in the possibility that inflation stays above 2% further out, partly because a host of outside factors are compounding the ECB’s problems.

A winter recession that was expected to push up unemployment was supposed to eat deep into price pressures. But the downturn is proving more benign than forecast and employment, already at a record high, is actually going up, not down.

Fiscal support for households is also proving more generous than hoped and this excessive spending is adding to purchasing power, countering the ECB’s restrictive policies.

Among the 20 countries that use the euro, including Croatia which joined this month, Spain has the lowest inflation rate, reaching 5.6% in December, Eurostat said. Latvia had the highest rate of 20.7%.

France and Germany this week both reported falls in inflation in December, further raising hopes that Europe may be past the peak of inflation.

Article Source: Euro zone inflation falls sharply in December but offers ECB little respite – RTE

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