FRANKFURT- Euro zone inflation jumped as expected last month, supporting the European Central Bank’s case to keep interest rates at record highs for some time, even as markets continued to bet on a rapid fall in borrowing costs.
Inflation across the 20-nation bloc jumped to 2.9 percent in December from 2.4 percent in November, just shy of expectations for a 3.0 percent reading, mostly on technical factors, such as the end of some government subsidies and low energy prices getting knocked from base figures.
The data is in line with the ECB’s prediction that inflation bottomed out in November and will now hover in the 2.5 percent to 3 percent range through the year, well above its 2 percent target, before falling to target in 2025.
Still, figures suggested that the structure of inflation is changing and while base and fiscal effects could yank around the headline figure, overall pressures may be easing.
The focus now turns to how wage settlements and global political tensions are impacting prices, two factors that could have longer-term consequences.
Wage deals are finalized in the first quarter in much of the euro bloc but data is not available until May, so policymakers will need perhaps until mid-2024 to get a reliable picture.
Geopolitical tensions are harder to predict. While the war in Gaza has had little effect on energy prices so far, the more recent disruption of shipping via the Suez Canal has pushed up transportation costs.
This in itself is not a big factor for prices but it could lift inflation if goods take longer to reach Europe over an extended period and shortages develop.
“Where higher costs are shipping specific, as at the moment, the inflation impact is very small,” Paul Donovan at UBS Wealth Management said.
“It is not the value of goods shipped, but the changing cost of shipping the goods that matters. Globally, shipping by sea accounts for less than 0.3 percent of global economic activity.”
The inflation jump comes as investors and policymakers appear to be drawing different conclusions about price trends and their implication for interest rates.
Investors are betting that the ECB will cut rates six times this year with the first move coming in March or April while policymakers arguethat it might take until mid-2024 to gain the confidence that inflation is indeed under control.
“Inflation is far from being defeated,” Commerzbank economist Christoph Weil said. “The ECB is likely to cut its key interest rates significantly less than the market currently expects.”
