ECB likely to be "unfazed" by cooling inflation, as core CPI sticky

(Alliance News) - Eurozone annual inflation fell faster than expected in December, Eurostat data showed on Friday, but the figures are unlikely to ignite any dovishness in the European Central Bank.

According to Eurostat, the flash estimate for harmonised index of consumer prices in December is 9.2%, slowing from 10.1% in November.

This came in below FXStreet-cited consensus of 9.7%.

"Policymakers at the ECB will not be in a celebratory mood though for a number of reasons. The most obvious is that it's still way too high, almost five times its target," said Oanda's Craig Erlam.

The second reason is that the decline was driven by a fall in energy, which, while "helpful", doesn't solve the problem of inflation, Erlam noted.

Annual energy inflation cooled to 25.7% compared with 34.9% in November.

"A combination of price caps and lower oil and natural gas prices have caused a significant dip in energy inflation," Bert Colijn, senior economist, eurozone, at ING said.

Oxford Economics noted that the decline in energy was boosted by temporary measures in Germany, which are likely to reverse in time.

Food, alcohol & tobacco inflation edged up 13.8% in December compared with 13.6% in November, followed by non-energy industrial goods at 6.4% compared with 6.1%.

On a monthly basis, inflation is expected to ease by 0.3%, accelerating from 0.1% in November. FXStreet-cited consensus had expected prices to tick up by 0.8% on a monthly basis.

"It is likely that the peak in inflation is behind us now, but far more relevant for the economy and policymakers is whether inflation will structurally trend back to 2% from here on," Colijn contended.

However, core inflation figures seem sticky.

Core inflation - which excludes energy, food, alcohol & tobacco - ticked up to 5.2% annually in December, from 5.0% in November. Monthly, core prices rose 0.6%, compared to a 0.1% drop the month before.

"The next two months will be critical as many businesses traditionally change prices at the start of the year. It could therefore be that core inflation rises further from now," Colijn said.

The European Central Bank has taken a "very hawkish stance" towards core inflation, and indicated it will "hike through a mild recession" to return inflation to its 2% target, he noted.

The rise is likely to prompt further 50 basis point hikes in February and March, Colijn maintained.

Oxford Economics continues to expect two 50 basis point hikes.

"All told, we think today's inflation numbers are unlikely to shift the hawkish ECB stance as the drop in headline inflation was coupled with further signs of rising underlying inflationary pressures," OE said.

However, it noted recent developments - such as a drop in gas prices and a "subdued" economic outlook - have increased the likelihood that the bank will pause afterwards, as inflation eases.

By Elizabeth Winter, Alliance News senior markets reporter

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