Euro Zone Inflation Increases in December

FRANKFURT (Reuters) – Euro zone inflation accelerated in December, an unwelcome but anticipated blip that is unlikely to derail further interest rate cuts from the European Central Bank.

Inflation in the 20 nations sharing the euro picked up to 2.4% last month from 2.2% in November, Eurostat said on Tuesday, in line with expectations in a Reuters poll of economists, lifted by more expensive energy and stubbornly high services costs.

Inflation has been oscillating just above the ECB’s 2% target recently, and data over the next few months could remain choppy. However, the overall trend is expected to point downwards, with the ECB’s goal likely to be hit sometime in the second half of the year.

The central bank cut interest rates four times last year and has stated that its target is now within sight, indicating more policy easing is on the horizon, although the speed and timing remain debatable.

Underlying inflation, a valuable indicator of the sustainability of price growth, remained sticky, possibly fueling calls for the ECB to exercise caution in relaxing policy restrictions.

Price growth excluding volatile food and energy held at 2.7%, while the closely watched services component, the largest item in the consumer price basket, accelerated to 4.0% from 3.9%.

Adding to the case for caution, a separate consumer survey from the ECB showed both near and medium-term inflation expectations rising, with figures three years ahead seen at 2.4%, up from the previous survey’s 2.1% and above the ECB’s own target.

December’s inflation jump, anticipated by markets after data out of Spain and Germany foreshadowed the trend, does not override near-term rate cut bets for now, with investors still fully pricing in a further reduction on January 30.

However, the expectation of a cut at every meeting through June is no longer fully anticipated, and investors now see a 50% chance that the ECB may skip a meeting in the first half. The 3% deposit rate is expected to hit 2% by the end of the year.

One reason for the more cautious market pricing is the dollar’s recent strength, which has made imports of key commodities more expensive, contributing to rising prices through more expensive energy, including fuel for cars.

The dollar could strengthen further if the new U.S. administration’s trade tariff proposals are implemented, which would likely be seen as a one-off impact not warranting policy action.

Regarding fundamental trends, even the most hawkish members of the ECB’s Governing Council seem to agree that inflation is largely under control and that the target is within reach.

Economic growth remains weak, the labor market is softening, and recent wage deals suggest a major slowdown in income growth, the primary driver for consumer price pressures.

Unemployment in the bloc remained at an all-time low of 6.3% in November, separate data showed on Tuesday, though the pace of new hiring has sharply slowed, with studies indicating a softening labor market for months.