From Morningstar:

Eurozone annual inflation sat at 2.9% in December, well above the European Central Bank’s target of 2%. This has dampened hopes of an interest rate cut by the ECB, leading to losses on stock and currency markets. However, core inflation fell to 3.4%, indicating that underlying inflation is, in fact, still decreasing.

The spike in inflation was driven by rising utility prices in several European countries, following the expiration of energy price caps set by governments. This contributed to an overall increase in prices for food, alcohol, tobacco, and services. Energy prices, however, fell significantly, dragging down non-energy goods and services.

Looking ahead, core inflation is expected to decrease to 2.5% by mid-2024, largely due to decreasing energy costs. The end of a lower VAT rate in Germany and higher CO2 prices could prevent a further decline in inflation, but underlying pressure is likely to continue to ease over time. The market will now turn its attention to the US non-farm payroll numbers for more insights.

While investors are concerned that the spike in inflation could lead to delayed interest rate cuts by the ECB, central bankers were already prepared for this possibility and it should not influence their decisions. However, the upcoming inflation release will be closely watched to see if Eurozone inflation can resume its downward trend.



Read more: Eurozone Inflation Puts Early ECB Rate Cuts in Doubt