Inflation isn’t beaten yet. Price rises are accelerating again in Europe

London (CNN) — Europe hasn’t quite shaken off the big, painful problem haunting its economies over the past two years.

Annual inflation in Germany and France, the European Union’s leading economies, rose in December. The first estimate of eurozone consumer price inflation for last month published Friday confirmed the trend — it rose to 2.9% from 2.4% in November.

It was the first increase in the annual rate of inflation across the 20 countries that use the euro since April 2023. EU data showed that further increases in the cost of food, alcohol and tobacco, as well as services, combined with a much less pronounced drop in energy prices year-over-year to push up the overall rate.

That could temper excitement among some investors that the European Central Bank (ECB) may be on the brink of cutting interest rates.

In Germany, consumer price inflation (CPI) stood at 3.8% in December, up from 2.3% in November, according to an official estimate released Thursday. In France, annual CPI jumped to 4.1% in December from 3.9% the previous month, preliminary data shows.

In both cases, energy prices helped drive up the headline rate of inflation.

Economists were expecting the upswing in part because governments have been unwinding generous subsidies introduced to support households during the energy crisis of 2022.

Since late 2021, when global inflation started to rise after the end of pandemic lockdowns, governments have funnelled hundreds of billions into subsidies shielding households and businesses from enormous rises in energy prices. Those rises were, in large part, fuelled by Russia’s full-scale invasion of Ukraine in February 2022.

The German government, for example, paid gas and heating bills for households in December 2022, dampening down inflation. Now that one-off subsidy has gone, and although energy prices have since fallen, they rose in December when compared with the artificially depressed levels of a year earlier.

The French statistics office said Thursday that the increase in inflation in December was due to “the acceleration over one year in prices of energy and services.”

Core inflation looking better

But Paul Donovan, chief economist at UBS Global Wealth Management, said he expects core inflation — which strips out volatile food and energy costs — across the 20 countries using the euro to continue to slow.

“The inflation momentum is still towards slower price increases,” he told CNN. “There is no evidence whatsoever of ‘sticky’ prices or higher longer-term inflation in any of the data we are seeing at the moment — in Europe, (the) UK, or the US.”

“The details of inflation continue to surprise more to the downside than the upside,” he added.

Annual core inflation in the eurozone fell to 3.4% in December from 3.6% in November.

“The more important issue is what happens to core inflation and underlying inflationary pressures,” said Andrew Kenningham, chief Europe economist at Capital Economics.

Markets fizzle

Accelerating headline inflation in major economies may dampen excitement among investors that central banks are poised to slash interest rates as early as the spring.

That excitement drove a stock market rally from late October that has seen Wall Street’s S&P 500 index, and Europe’s benchmark Stoxx 600 index, since shoot up 15% and 11% respectively.

High interest rates typically put pressure on stocks as investors tend to favor bonds offering comparable, steady returns.

But stocks have failed to launch so far in 2024. The S&P 500 index has fallen 1.1%, and the Stoxx 600 index 0.4%, since markets re-opened on January 2.

Escalating tensions in the oil-producing Middle East have also piqued concerns about the trajectory of energy prices. Brent, the global oil benchmark, rose by more than 3% to close at $78 a barrel on Wednesday.

On Wednesday, minutes published from the US Federal Reserve’s December policy meeting showed officials were cautious about declaring victory over inflation, and an end to their almost two-year long campaign of rate hikes.

While the Fed’s key interest rate was “likely at or near its peak,” the minutes read, officials deemed it “appropriate for policy to remain at a restrictive stance for some time until inflation was clearly moving down sustainably.”

Last month, Isabel Schnabel, an ECB executive board member, said that inflation was likely to “pick up again temporarily” partly because government energy subsidies were expiring. “We still have some way to go,” she said.

“For the ECB, this re-acceleration of inflation strengthens the stance of keeping a very steady hand and not rushing into any rate cut decisions,” Carsten Brzeski, global head of macroeconomic research at ING, wrote in a Thursday note, adding that he still expects the central bank to make its first rate cut in June.

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