Euro-zone inflation’s sharp drop masks underlying pressures

Bloomberg

Euro-area inflation returned to single digits for the first time since August, fuelling hopes that the bloc’s worst-ever spike in consumer prices has peaked.
December’s reading came in at 9.2%, Eurostat said, with slower growth in energy costs the only reason for the moderation. The figure reflects slowdowns in Germany, France, Italy and Spain and was less than the 9.5% that economists polled by Bloomberg had expected.
Highlighting how inflation continues to menace Europe’s economy, however, a measure of underlying price pressures that strips out energy and food edged up to a record 5.2%.
It’s this gauge that the European Central Bank (ECB) is likely to focus on as it pushes ahead with what’s already the most aggressive bout of interest-rate hikes in its history.
In the US, the Federal Reserve, too, is looking past an easing in headline inflation, warning investors against underestimating its will to tighten monetary policy for some time yet.
ECB Governing Council member Mario Centeno called the latest price data from Europe “quite positive,” but said borrowing costs must still be pushed higher.
“Interest rates will rise until the moment when we consider that the inflation profile is sufficiently robust to as quickly as possible bring inflation to 2%,” he told a conference in Lisbon.
“We can’t hesitate on the path. In our opinion, inflation is more negative for the economy than this process of normalising interest rates.”
A second month of cooling price gains in the euro zone, which expanded to 20 countries from 19 this month as Croatia joined, came after Germany’s government paid some households’ natural gas bills to cushion the surge in costs since Russia invaded Ukraine.
Indeed, the drop in German consumer prices was almost solely responsible for the 0.3% monthly decline in the euro area, according to Bloomberg calculations.
The ECB has already pledged to lift its deposit rate beyond its current level of 2%. The peak for borrowing costs may only be reached towards the summer, according to Bank of France chief Francois Villeroy de Galhau.
“We’ll then be ready to remain at this terminal rate as long as necessary,” he said in Paris.
Money-market traders left bets on the peak in the deposit rate largely unchanged on Friday, wagering on about 152 basis points of additional tightening by mid-2023.