Eurozone Inflation Puts Early ECB Rate Cuts in Doubt

European
stock
markets
have
extended
their
intra-day
losses
as
a
result.
The
Stoxx
Europe
600
index
is
down
nearly
0.9%
since
open
as
excitement
for
an
ECB
rate
cut
dissipated.
The
euro
also
fell
against
the
US
dollar,
and
was
worth
€1.09
at
the
time
of
writing.

“For
those
hoping
inflation
would
continue
to
fall
in
a
straight-line
fashion,
the
news
that
European
inflation
rose
50
basis
points
to
2.9%
in
December
will
come
as
a
shock,”
says
Michael
Field,
Morningstar’s
European
market
strategist.

“Having
fallen
so
close
to
the
ECB’s
targeted
2%
level,
it
is
of
course
disappointing
to
see
inflation
rise
again;
however,
there
is
a
very
reasonable
explanations
for
this.

“As
we
saw
earlier
this
week
in
France
and
Germany,
rising
utility
prices
were
the
cause
of
this
rise
in
overall
inflation.
This
is
essentially
a
technicality.
Oil
prices
have
fallen
massively
from
their
2022
highs,
but
in
December
the
caps
that
many
European
governments
had
placed
on
energy
prices
ran
out,
meaning
prices
went
up,
impacting
inflation”.

Core
inflation,
meanwhile,
which
shows
price
hikes
without
the
cost
of
energy
and
food,
actually
fell
20
basis
points
to
3.4%
in
December.

“So
the
real
takeaway
here
is
that
we
are
still
moving
in
the
right
direction,
and
that
underlying
inflation
is
still
falling”,
Field
adds.

In
December,
the
greatest
contributors
to
Eurozone
inflation
were
food,
alcohol
and
tobacco
(+6.1%
year-on-year),
followed
by
services
(+4%),
non-energy
industrial
goods
(+2.5%)
and
energy
(-6.7%),
according
to
Eurostat.

Later
this
afternoon,
markets
will
focus
on
the
US
monthly
non-farm
payroll
numbers
for
signs
of
when
the
Federal
Reserve
(Fed)
may
cut
interest
rates. 

“Some
investors
will
undoubtedly
be
concerned
this
spike
in
inflation
may
put
the
ECB
off
cutting
interest
rates
sooner
rather
than
later.
However,
central
bankers
were
always
aware
of
the
potential
for
this
spike
in
inflation,
thus
it
shouldn’t
factor
in
on
their
decision
making
process”,
Field
says.

“That
said,
all
eyes
are
on
next
month’s
inflation
release,
and
whether
we
can
get
back
to
that
all
important
downward
trend”.

For
its
part,
Commerzbank
notes
that
the
end
of
a
lower
VAT
rate
on
natural
gas
and
restaurant
services
in
January,
alongside
higher
CO2
prices
in
Germany,
could
also
prevent
a
stronger
decline
in
Eurozone
inflation.

Adjusted
for
these
effects,
however,
the
underlying
upward
pressure
on
prices
should
continue
to
ease
over
the
course
of
the
year.
That’s
thanks
to
cheaper
energy
dampening
price
rises
for
non-energy
goods
and
services
for
a
few
more
months.
The
bank
now
estimates
core
inflation
rate
will
likely
fall
to
2.5%
by
the
middle
of
2024.

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