Euro zone inflation jumped in December as expected, data showed today, mainly because of more expensive oil, but falling core inflation is likely to cap headline price rises in coming months, economists said.
The European Union's statistics office Eurostat estimated that consumer prices in the 16 countries using the euro rose 0.9 per cent year-on-year in December after a 0.5 per cent rise in November.
The flash estimate does not include monthly data or a detailed breakdown, which will be available only on January 15th, but economists said the annual rise was consistent with a 0.3 per cent month-on-month increase.
"It is likely that an adverse base effect on energy was virtually the only driver of the inflation acceleration - we think energy added 0.4 percentage points to the yearly inflation rate," said Marco Valli, economist at Unicredit.
Crude oil prices in December 2008 were almost half of the $70-77 per barrel range last month.
"The recent significant increase in euro-denominated oil prices will push the inflation rate up further in January, most likely above the 1 per cent mark," Valli said.
"The key inflation trends for 2010 are a continuation of the deceleration in core prices, a further increase in energy pressures, and an only moderate recovery in food inflation. All in all, we expect the inflation rate to fluctuate in a relatively narrow band this year: 1.0-1.6 per cent," he said.
Economists said that large excess capacity in the economy and weak demand was likely to push down core inflation, which excludes the volatile energy and unprocessed food prices.
Further downward pressure on core inflation, which the European Central Bank watches keenly in policy decisions, would come from growing unemployment, which will limit wage growth.
"Headline inflation is forecast to increase over the coming months, driven up mainly by less favourable energy related base effects. However, these increases will be limited by downward pressures on core inflation," said Clemente de Lucia, economist at BNP Paribas.
The European Central Bank aims to keep headline inflation below, but close to 2 per cent over the medium term and economists said that any near-term interest rate rises remained unlikely despite the nascent economic recovery.
"Even next year, headline inflation will remain relatively low," said Nick Kounis, economist at Fortis Bank.
"The picture we have is of fairly slow economic recovery accompanied by low inflation. That will allow the ECB to remove its policy accommodation slowly."
Reuters