Eurozone inflation remains subdued to keep ECB on toes
Eurozone inflation was confirmed at the subdued level of 1.4% last month, keeping the issue at the forefront of the European Central Bank's thoughts.
December's consumer price index was up 0.4% on the preceding month, as indicated at the initial 'flash' reading, up from 0.1% a month earlier.
On an annual basis, euro area CPI was unchanged from the first reading at 1.4%, easing from 1.5% the previous month. Core CPI, which excludes more volatile prices such as fuel and food, also remained unmoved at 0.9%.
The ECB, according to minutes of its December meeting, concluded that the current weakness may be due to one-off factors and therefore be temporary. Many in the market have interpreted ECB comments as indicating the asset purchases of its quantitative easing programme are likely stop after September 2018.
December's final inflation release from Eurostat revealed lower price increases in energy were only partly offset by a moderately larger rise in prices of processed food and non-energy industrial goods. Services inflation was roughly unchanged.
A faster rise in transport costs was offset by slower price increases for package holidays.
The euro fell almost 0.4% against the dollar and sterling, to $1.2216 and £0.8854.
Looking forward, economist Florian Hense at Berenberg forecast that annual rates of headline inflation are "likely to moderate slightly" in the coming month as the base effect from the stronger increase in oil prices a year ago outweighs the recent renewed spike in oil prices. "From spring onwards, inflation is likely to edge up again."
He said recent hawkish comments, including the minutes of the last meeting, indicate ECB is likely stop asset purchases towards the end of this year.
"Becoming ever more confident in the convergence of inflation towards its target, and possibly also fearing to fall behind the curve, the ECB will likely adjust its forward guidance and policy. However, in order to not trigger a further appreciation of the euro, the ECB will likely change its communication only cautiously and gradually – and not in January already."
John Dolan, senior dealer at FEXCO, said the fall in the single currency was a "pause for breath, nothing more".
“The Euro’s bull run continues, as the impetus behind it – hopes that the ECB will begin returning monetary policy to normal sooner rather than later – remains intact.
“Mario Draghi may not have an inflationary imperative to dial down QE, but with the Eurozone enjoying strong growth and falling unemployment, the ECB’s monetary stimulus is looking ever more anachronistic."