Frankfurt Inflation in the euro area eased further in December. Consumer prices rose by 9.2 percent compared to the same month last year. This was announced by the European statistical office Eurostat on Friday based on an initial estimate. In November, the inflation rate was still 10.1 percent. Experts polled by the Reuters news agency had forecast a figure of 9.7 percent for December.
The European Central Bank (ECB) is actually aiming for a value of two percent for the currency area. Inflation has continued to move away from this mark since mid-2021. The ECB has therefore already raised interest rates in the euro area significantly. The easing of price pressure is likely to fuel the debate on how far the ECB should hike interest rates.
In December, the central bank raised interest rates by half a percentage point. The key interest rate is thus 2.5 percent and the deposit rate, which is currently even more important for the financial markets, is 2.0 percent. However, central bank chief Christine Lagarde promised further increases of half a percentage point each for the next few meetings. There was some criticism of this clear definition.
A lower rise in energy prices was the main contributor to the moderation in inflation in December. Compared to the previous year, these increased in price by 25.7 percent. In November, the increase was still 34.9 percent. In Germany, energy prices were slowed down, among other things, by the fact that the state takes over the down payment for gas in December. In addition, oil and gas prices have fallen significantly.
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Commerzbank chief economist Jörg Krämer sees no real relaxation in the figures. “Inflation in the euro area has only fallen significantly because fuel and heating oil have become cheaper and the German government took over the gas payments for many citizens in December,” he says. Kramer points out that core inflation, which excludes the particularly volatile prices for energy, food and tobacco, rose from five to 5.2 percent. This is a new record.
Alexander Krüger, chief economist at the private bank Hauck Aufhäuser Lampe, also remains cautious: “The inflation rate is falling, but the fight against inflation is not yet won.”
The head of the central bank, Christine Lagarde, has also recently expressed reservations. She had already predicted a fall in inflation in December but dampened hopes of a turnaround.
At her press conference in December, she emphasized that rates are likely to rise again in January and February. In an interview with the Croatian newspaper “Jutarnji List”, Lagarde also pointed out that the drivers of inflation had changed. So far, supply bottlenecks have been the main cause.
But now you have to be careful that the fiscal measures, such as spending on state aid to curb energy prices, do not lead to inflation becoming entrenched.
She also sees dangers from the stronger wage dynamics. A warning signal, for example, is that the prices for services are rising more sharply. In these, wages play a greater role because they are particularly labour-intensive. Services went up 4.4 percent in December after 4.2 percent in November.
Particularly high inflation in Baltic States
Inflation is particularly high in the Baltic states of Estonia (17.5 percent), Latvia (20.7 percent) and Lithuania (20 percent). These are particularly badly affected by the consequences of the Russian war of aggression against Ukraine – above all higher energy prices. Because incomes are lower there, people spend more on energy and food. As a result, the drastic price increase for these goods is more strongly reflected there.
In contrast, the inflation rate within the euro area was lowest in France for a long time. There it was 6.7 percent in December. Meanwhile, Spain brings up the rear with a value of 5.6 percent.
In both countries there are already price brakes for energy. In Germany, the inflation rate according to the European calculation method, which ensures comparability between countries, was 9.6 percent. According to the calculation method preferred by the Federal Statistical Office, for which a slightly different basket of goods is used, it was listed at 8.6 percent.
In view of the persistently high price pressure, most experts expect further interest rate increases in the euro area. The US bank Goldman Sachs expects the ECB to raise interest rates by half a percentage point each at the upcoming Council meetings in February and March, and by a quarter of a percentage point in May. The deposit rate would then be 3.25 percent.
Commerzbank also assumes that the peak for the deposit rate in the euro area will be 3.25 percent. The economists at Bank of America even expect an increase to 3.5 percent by June 2023. The deposit rate was last at such a level in 2001.
More: The dispute over interest rates and inflation has shifted the balance of power in the ECB and weakened Lagarde