Eurozone inflation rises less than expected in December

(Sharecast News) - Inflation in the eurozone accelerated in December, according to Eurostat on Friday, but by less than expected, reinforcing expectations that the European Central Bank will soon move to cut interest rates. The annual change in the harmonised index of consumer prices rose to 2.9% last month, a significant increase from 2.4% in November as a result of a big drop in energy prices in Germany in December 2022 due to one-off subsidies by the government.

However, the impact of this on the overall inflation rate will only be temporary. "This does not mean inflation is about to break its downward trend - base effects should bring inflation down sharply early next year," said analysts at TD Securities.

Nevertheless, the consensus estimate was for a stronger increase to 3.0%.

The core rate of annual inflation, which strips out volatile items like food and energy, actually eased to 3.4%, from 3.6% the month before and below the 3.5% market forecast.

"Markets currently anticipate that the ECB will cut the interest with almost 150 basis points [this year], but markets seem to be slowly walking back from the narrative of the ECB slashing interest rates to this extent. Still, a significant undershoot for Eurozone inflation could see this narrative become dominant again," said analysts at Rabobank in an email ahead of Friday's release.

"We expect a far more modest easing cycle for this year with the ECB cutting rates with 50 basis points."