Euro zone inflation jump cools case for ECB rate cuts
By Balazs Koranyi
FRANKFURT (Reuters) -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% in December from 2.4% in November, just shy of expectations for a 3.0% 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% to 3% range through the year, well above its 2% 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 finalised 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.
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