Eurozone Inflation Review: A few hawkish signals, a few dovish signals, there's something for everyone

Hugo Le Damany and François Cabau, Economist and Senior Eurozone Economist at AXA Investment Managers, comment on the latest inflation figures published:

Eurozone flash headline inflation rebounded to 2.9% y/y in December (+0.5 point), slightly below our forecast and consensus'. Core inflation decelerated to 3.4% y/y from 3.6%, 0.1pp below our forecast of 3.5% but in line with the consensus.

Non energy industrial goods and services prices were in line with our forecasts, respectively at 2.5% y/y (-0.4p) and 4% (flat). By the way, it means the 3.4% published by Eurostat is not far from 3.5% as our core inflation forecast was at 3.46%. Energy prices declined on a monthly basis (-1.5% m/m) but rose on an annual basis due to base effect (6.7% y/y, 0.1pt below our forecast). Our only small miss was on food prices which decelerated faster than planned at 6% y/y (-0.9p).

Across countries, German inflation has strongly distorted the December print with headline rising to 3.8% y/y (+1.5p). Most of it is explained by gas bills paid by the government in December 2022. Thus, we probably had slightly upward pressure from package holidays unless the impact of higher weight has probably been smoothed by the structural break caused by the new data collection methodology. France headline inflation also increased (4.1% y/y, +0.2p), driven upwards by energy and services prices. If the former is explained by base effects, there is not such reason for services prices which rose to 3.1% y/y (+0.3p) according to preliminary details released by the French statistical agency for Consumer Price Index (CPI). Italy and Spain Harmonised Indices of Consumer Prices (HICP) headline were broadly stable at respectively 0.5% y/y (-0.1p) and 3.3% (flat).

The ECB seasonally adjusted measure of inflation came at 2.7% m/m ann. or 1.2% m/3m ann. depending on if you look month over month annualised (m/m ann.) or month vs three month before annualised (m/3m ann.). We now clearly see that November print was an outlier in its amplitude of deceleration. This has probably been amplified by larger decline ​ in NEIG prices. However, the momentum over several months is unchanged and core inflation keeps decelerating .

Regarding the ECB, we believe this print is unlikely to shift the tone. Indeed, Ms Lagarde has clearly stated at the latest press conference that they expected a small uptick in inflation. Both doves and hawks can pick up arguments.

For doves:

For hawks:

We now draw the attention to January prints, which usually set the tone for the entire year. Indeed, this is the period at which several businesses fix their prices for the year while they have a clearer outcome on ongoing wages negotiation. At this stage, our forecasts for January are unchanged (2.9% y/y for headline and core at 3.25%) as December preliminary details were largely in line with our expectations. Looking forward, our core inflation trajectory is unchanged and keep going down, but at a slower pace (2.7% y/y at mid-year). 

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Notes to editors

All data sourced by AXA IM as at 5 January 2024.

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