The acceleration in euro zone inflation in December was expected. More importantly, the “core measure”, which excludes energy, food, alcohol and tobacco, dropped to a 21-month low. That puts the refusal by European Central Bank President Christine Lagarde to discuss rate cuts even more at odds with market expectations of a looser policy.
Headline inflation in the 20 countries sharing the euro rose at an annual rate of 2.9% in December from 2.4% a month earlier, according to the first official estimate released on Friday. That is mostly due to the waning effects of energy subsidies. Those factors are likely to be reversed in January. Core inflation, on the other hand, fell to 3.4%, from 3.6% in November. And prices of food, alcohol and tobacco increased by 6.1%, down from 6.9% in November.
Admittedly, services inflation remained robust at 4%. But with the euro zone economy flirting with recession, these numbers suggest the ECB should stop refusing to even discuss lowering borrowing costs. Investors expect seven rate cuts this year, which would bring the benchmark deposit rate to around 2.5% from the current record of 4%, according to derivatives prices collected by LSEG. As inflation numbers drop, so does the credibility of the ECB’s hard line. (By Francesco Guerrera)
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