Introduction

The latest data released by the European Union's statistics agency Eurostat reveals that Eurozone inflation rebounded in December. However, the increase was lower than anticipated, adding to speculation about the possibility of interest rate cuts by the European Central Bank (ECB).

Inflation Figures

According to preliminary data from Eurostat, the Eurozone's consumer price index (CPI), which measures the cost of goods and services, rose by 2.9% compared to the previous year. This is a slight increase from the November figure of 2.4%. Economists polled by The Wall Street Journal had predicted a higher inflation rate of 3.0% for December. It is worth noting that inflation had been on a downward trend for five consecutive months until November.

Core Inflation

In December, core inflation, which excludes volatile energy, food, alcohol, and tobacco prices and provides insight into underlying inflationary trends, decreased to 3.4% from the November figure of 3.6%. This reading also fell short of the consensus forecast of 3.5%.

Implications

The lower-than-expected inflation figures for both headline and core inflation may lead to increased calls for the ECB to implement rate cuts sooner rather than later. These figures suggest stronger disinflationary trends and indicate that the central bank's target of 2% inflation may be within reach. Additionally, industrial producer prices saw a decline of 0.3% in November, further indicating easing price pressures.

In conclusion, while Eurozone inflation rebounded in December, it did not meet expectations. This development has sparked speculation about potential rate cuts by the ECB in response to ongoing disinflationary pressures.

Money Markets Anticipate Rate Cut in April

According to data from Refinitiv, money markets are pricing in a first 25-basis-point rate cut in April. The European Central Bank (ECB) decided to hold rates steady at its last meeting in December, maintaining the key deposit rate at 4.0%.

Inflation Boosted by Energy Costs

December's rebound in headline inflation was primarily driven by energy costs, which experienced a slower decline compared to November. Eurostat reported that energy prices were down 6.7% on a yearly basis in December, compared to an 11.5% decline the previous month. This reduction was likely influenced by the German government's assistance program introduced in late 2022, which cushioned gas and heating bills in Europe's largest economy.

Inflation Rate Highlights

When measured using EU-harmonized standards, Germany experienced a surge in inflation from 2.3% to 3.8%, while France saw a slight increase from 3.9% to 4.1%. Italy's inflation rate decreased from 0.6% to 0.5%, and Spain's inflation remained flat at 3.3%.

Cooling Food, Alcohol, and Tobacco Inflation

Although food, alcohol, and tobacco inflation rates across the bloc were still significantly higher than the headline rate, they did experience a cooling effect, dropping from 6.9% in November to 6.1% in December.

Reversal Expected in January

Jack Allen-Reynolds, Deputy Chief Eurozone Economist at Capital Economics, predicts that most of December's increase in headline inflation will be reversed in January due to further declines in food and core inflation.

"While ECB policymakers insist on keeping interest rates high for the time being, we anticipate that they will begin cutting rates around April," Allen-Reynolds added.