Inflation in the Eurozone rises again in December

The inflation rate in the euro zone has risen again – to 2.9 percent. There is a similar trend in Germany. Experts warn that inflation should continue to be taken seriously. How does the European Central Bank react?

Inflation in the Eurozone is increasing again. In December, consumer prices rose by 2.9 percent compared to the same month last year, as the Eurostat statistics office announced today in an initial estimate. Analysts had expected inflation to rise; in November it was still at 2.4 percent.

This means that inflation has increased again for the first time after seven months of declines. A statistical effect also contributed to the increase. In December 2022, gas prices for consumers in Germany, the largest economy in the currency area, fell sharply because the state paid the one-off cost of the discount.

Food and beverages were still significantly more expensive in December than a year ago, but price inflation fell to 6.1 percent after 6.9 percent in November. The previously sharp decline in energy prices slowed noticeably.

Big differences in the Eurozone

There are still very different inflation rates in the currency area. They range from 0.5 percent in Belgium to 6.6 percent in Slovakia. In Germany, inflation calculated according to European standards is 3.8 percent. According to national calculations, it was 3.7 percent in December.

The annual inflation rate (HICP), calculated for European comparison, rose to 4.1 percent in France in December from 3.9 percent in November.

In Italy, however, the inflation rate fell again in December. Consumer prices rose by 0.5 percent compared to the same month last year. In November inflation was still at 0.6 percent. Italy currently has the lowest inflation rate in the Eurozone, along with Belgium.

Core inflation is declining

The European Central Bank’s (ECB) medium-term goal of a general inflation rate of two percent is becoming a bit more distant again with the new data. In contrast, core inflation, which excludes volatile energy and food prices, continues to decline. In this regard, Eurostat reported a decline in the annual rate to 3.4 percent in December, after 3.6 percent in November. In the opinion of many economists, core inflation reflects the inflation trend better than the overall rate.

“At 2.9 percent it shows that inflation is still being taken seriously. Since there is a threat of new price hikes, a decline in inflation with much fanfare is not imminent,” says Alexander Krüger, chief economist at Hauck Aufhäuser. A look at the core rate also urges caution. The ECB will continue to be patient instead of declaring inflation victory too early.

Jörg Krämer, chief economist at Commerzbank, makes it clear: “It is too early to give the all-clear on the inflation front. The ECB should not give in to the pressure from the markets, which expect a first interest rate cut as early as April.”

Will the ECB cut interest rates this year?

There had recently been speculation on the stock market that, after ten interest rate increases since the summer of 2022, the ECB could lower rates again for the first time in March or April. Several monetary authorities had tried to dampen this speculation. The money market is currently expecting the deposit rate to fall to 2.5 percent by the end of the year – i.e. the interest that financial institutions receive when they park excess funds with the central bank. The rate is currently 4 percent.

Policymakers argue that pricing pressures remain high and key wage deals will not be finalized until the first quarter of this year. It could therefore take until mid-2024 before there is certainty that inflation is actually under control.