(Bloomberg) — Euro-area inflation accelerated last month, supporting the European Central Bank’s gradual approach to reducing interest rates, without derailing them altogether.
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Consumer prices rose 2.4% from a year ago in December, up from 2.2% in November and matching the median estimate in a Bloomberg poll. The increase was largely driven by energy costs, which climbed for the first time since July, Eurostat said.
Core inflation, which strips out such volatile components, stood at 2.7%. In the services sector, price growth edged up to 4%.
The pickup will come as no surprise to the ECB, which has repeatedly warned that the path back to its 2% target will be bumpy. It only expects to sustainably hit that milestone toward year-end. A Bloomberg Economics nowcast sees inflation holding at 2.4% in January.
Bonds were little changed after the data. The German two-year yield, among the most sensitive to monetary policy, was one basis point lower at 2.18%, just below a two-month peak reached yesterday. Wagers on ECB rate cut expectations were also steady, with swaps pricing pointing to just over 100 basis points easing by year-end.
What Bloomberg Economics Says…
“A large part of the increase comes from fuel price base effects – there’s no evidence that domestic cost pressure is moving materially upwards. The big picture remains one of generalized disinflation which will allow the Governing Council to keep cutting this year — we expect 100 basis points of easing.”
—Jamie Rush, chief European economist. For full react, click here
National reports in recent days already showed prices rising more strongly than estimated in Germany and Spain, while they increased less than anticipated in France and unexpectedly slowed in Italy. A separate report from the ECB showed that inflation expectations of consumers increased in November.
Officials are still on track to keep lowering borrowing costs after a fourth reduction in December. At 3%, the deposit rate is still seen by most as restricting economic activity at a time when the currency bloc is failing to mount a strong recovery.
Most back “gradual” cuts at the upcoming meetings, meaning quarter-point increments. A few Governing Council members, including Bank of France Governor Francois Villeroy de Galhau, insist that the option of a bigger reduction must remain on the table, however.
