Eurozone Inflation Eases on Lower Energy Prices

Lower energy prices helped to push inflation in Europe lower last month, the European Commission reported on Friday, but many prices are still rising at a brisk pace and policymakers have given little indication that they plan to halt planned interest rate increases.

Consumer prices in the countries that use the euro as their currency rose at an annual rate of 9.2 percent in December, down from the double-digit levels of 10.1 percent in November and 10.6 percent in October.

The decline in inflation has sparked hopes that the relentless rise across the continent may have finally peaked. But several influential voices have urged caution, noting that while the so-called headline rate of inflation has eased, core inflation, which strips out volatile food and energy prices, has not shown the same drop. In fact, for December, the eurozone’s core rate of inflation rose to 5.2 percent, from 5 percent the month before.

Europe has benefited from a streak of mild weather, which has lowered the demand for energy, particularly the natural gas used to power much of the continent’s heating infrastructure. Several governments have also offered subsidies to blunt the painfully high energy prices that consumers pay. The drop in Germany’s inflation rate, to 9.6 percent in December from 11.3 percent the month before, was partly due to one-time assistance to help households pay their energy bills, according to the government’s statistics office.

The data showed that energy prices in the eurozone rose at an annual rate of 25.7 percent in December, down from as high as 41.5 percent in October.

“Europe is very lucky at the moment with the weather,” said Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics. He added that government energy relief had inserted a “wedge between reality and the data.”

“It’s a price control,” he said, and “once you take out that, it’s not as clear that inflation is that benign.”

Nearly all eurozone countries marked a decline in their main inflation rate in December, including France (6.7 percent, from 7.1 percent in November), Italy (12.3 percent, from 12.6 percent), Spain (5.6 percent, from 6.7 percent) and the Netherlands (11 percent, from 11.3 percent).

The numbers bolstered the argument that the eurozone’s record-setting pace of inflation in the past year will slowly lose steam in 2023.

“We are likely past the peak,” said Riccardo Marcelli Fabiani, an economist at Oxford Economics, in a note on Friday. But he added, “we expect inflation to cool only gradually, remaining high in the short term.”

The European Central Bank, which has a target of 2 percent annual inflation, has already indicated that it is likely to raise interest rates half a point in February. Christine Lagarde, the bank’s president, said last month that she expected interest rates to rise “significantly further, because inflation remains far too high and is projected to stay above our target for too long.”

The December data, showing easing overall inflation but persistent underlying price pressure, will probably stoke “tense negotiations among policymakers in the next few months” noted Mr. Vistesen after the numbers were released.

The Federal Reserve, the U.S. central bank, is also expected to continue raising rates.

This week, Gita Gopinath, first deputy managing director of the International Monetary Fund, told the Financial Times that the Fed should “stay the course” with its planned increases.

“I think it’s clear that we haven’t turned the corner yet on inflation,” she said. At the same time, the fund has also projected that a third of the world economy will face recession this year.

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