Eurozone inflation will decline in December 2022 as energy costs recede

Inflation in the eurozone fell for the second month in a row in December, but analysts do not expect it to prompt a change in tone from European Central Bank.

The headline inflation rate, which includes food and energy costs, was 9.2% year-on-year in December, according to preliminary data released on Friday from the European statistics agency, Eurostat. This follows November’s headline inflation rate of 10.1%, which marks the first slight contraction in prices since June 2021.

The eurozone economy has been under enormous pressure in the aftermath of Russia’s invasion of Ukraine in February 2022, with energy and food costs soaring last year. In an effort to combat rising prices, the European Central Bank raised interest rates four times in 2022 and said it was likely to continue to do so this year. The bank’s main interest rate is currently 2%.

Despite other signs of declining inflation, analysts say it is too early to celebrate and do not expect a pivot from the region’s central bank.

Interest rates will come to 3 (%) and will probably have to maintain that throughout the year even as the recession becomes more pronounced, Hetal Mehta of Legal & General Investment Management told CNBC’s “Street Saints” Thursday.

It comes after the head of the European Central Bank Christine Lagarde December’s particularly hard-line tone: “We don’t pivot, we don’t waver, we show determination.” She added that the bank had “more ground to cover”.

Earlier this week, European Central Bank Governing Council member and Bank of France Governor Francois Villeroy de Gallau said interest rates could peak by summer.

The ECB also said in December that it would start cutting its balance sheet in March at a pace of 15 billion euros ($15.8 billion) per month until the end of the second quarter. The move is also expected to address some of the inflationary pressures in the region.

At that time, it was The central bank expected the inflation rate to average 8.4% for 2022And 6.3% for 2023 and 3.4% for 2024. The bank’s task is to work towards achieving a headline inflation figure of 2%.

Earlier this week, data from Germany showed inflation fell from 10% in November to 8.6% in December.

Carsten Brzeski, global head of macroeconomics at ING Germany, said the figures are “not comforting, but just a reminder that inflation in the eurozone remains mainly an energy price phenomenon”.

Energy costs in Europe have fallen in recent months. Natural gas prices, for example, were trading at around €72.42 per megawatt hour on Friday – sharply lower than their peak of €349.90 per megawatt hour in August.

Among the components of inflation, energy continued to be the biggest driver in December, but retreated from previous levels. Energy costs fell from 34.9% in November to an estimated 25.7% in December, according to the latest figures.

“The ECB cannot and will not base its policy decisions on highly volatile energy prices. Instead, the central bank will, in our view, raise interest rates at the next two meetings by a total of 100 basis points,” Brzeski said in a note. .

Klaus Vestessen, chief eurozone economist at Pantheon Macroeconomics, said in a note this week that he sees “slight relief” in the inflation data, “which will keep the ECB on its toes at the start of the year.” He expects to raise interest rates twice by 50 basis points in the first quarter.

meIn terms of national breakdown, the Baltic states again recorded the highest jumps in inflation, averaging around 20%.