# Big fall in euro zone inflation offers little help for ECB
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2023-01-06
Category: FINANCE
Category URL: https://financedigest.com/category/finance
Meta Title: Euro Zone Inflation Tumbles: ECB to Keep Raising Rates
Meta Description: Euro zone inflation drops while core prices rise, leading ECB to continue hiking rates. Analysts predict two 50 basis point hikes in February and March for
URL: https://financedigest.com/big-fall-in-euro-zone-inflation-offers-little-help-for-ecbhtml

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By Balazs Koranyi and Jan Strupczewski

FRANKFURT/BRUSSELS (Reuters) -Euro zone inflation tumbled last month but underlying price pressures are still rising and economic growth indicators are surprisingly benign, suggesting that the European Central Bank will keep raising interest rates for months to come.

Fighting a historic surge in prices, the ECB has since July increased borrowing costs at its fastest pace on record. It has promised a string of further moves this [year to curb inflation that its own economists see](https://www.financedigest.com/10-year-david-goliath-crusade-finally-sees-justice-for-off-plan-spanish-property-buyers.html "10 year ‘David & Goliath’ crusade finally sees justice for off-plan Spanish property buyers") staying above its 2% target well into 2025.

Consumer [price growth across the 19 countries using the euro](https://www.financedigest.com/euro-zone-inflation-eases-in-feb-but-core-prices-pick-up.html "Euro zone inflation eases in Feb but core prices pick up") slowed to 9.2% in December from 10.1% a month earlier, Eurostat data showed on Friday – well below a Reuters poll forecast of 9.7%, with the decline driven by lower energy prices.

The [euro zone](https://www.financedigest.com/euro-zone-consumers-more-optimistic-on-inflation-ecb-survey-shows.html "Euro zone consumers more optimistic on inflation, ECB survey shows") has since expanded to 20 nations, with Croatia joining on Jan. 1.

But the headline number masked a more malignant trend, with all key components of [core inflation](https://www.financedigest.com/boes-mann-falling-headline-inflation-high-core-make-policy-difficult.html "BoE’s Mann: Falling headline inflation, high core, make policy difficult") accelerating.

Excluding volatile [food and energy prices](https://www.financedigest.com/world-food-prices-hit-record-high-in-2022.html "World food prices hit record high in 2022"), inflation picked up to 6.9% from 6.6%, while an even narrower measure that also excludes alcohol and tobacco rose to 5.2% from 5%.

Services and non-energy industrial goods inflation, both watched closely by the [ECB to gauge the durability of price](https://www.financedigest.com/explainer-oil-price-surge-changes-ecb-narrative-only-at-the-margins.html "Explainer-Oil price surge changes ECB narrative only at the margins") growth, accelerated, adding to concerns that inflation is proving more stubborn than expected.

Rising core [inflation means that not much will sway the European Central Bank from the hawkish path it set](https://www.financedigest.com/european-shares-set-for-weekly-gain-on-u-s-inflation-outlook.html "European shares set for weekly gain on U.S. inflation outlook") out late last year,” ING economist Bert Colijn said.

[MILD RECESSION](https://www.financedigest.com/low-use-of-shortened-work-hours-points-to-mild-german-recession-ifo.html "Low use of shortened work hours points to mild German recession – Ifo")

A string of other indicators also suggest that the bloc’s winter recession will be milder than anticipated, [leaving the ECB](https://www.financedigest.com/analysis-euros-20-year-low-leaves-ecb-facing-costly-choices.html "Analysis-Euro’s 20-year low leaves ECB facing costly choices") with more work to do to tame prices.

A [key economic sentiment indicator improved more than expected while retail sales data](https://www.financedigest.com/sterling-edges-lower-ahead-of-key-data.html "Sterling edges lower ahead of key data") also showed surprising resilience.

Exceptionally [mild weather](https://www.financedigest.com/winter-weather-could-be-mild-german-met-office-dwd-says.html "Winter weather could be mild, German met office DWD says"), implying lower consumption of costly energy, will help too, by propping up household spending power and preserving corporate margins.

But that may complicate life for the ECB.

The recession was [expected to push](https://www.financedigest.com/hawkish-ecb-comments-push-up-rate-hike-expectations.html "Hawkish ECB comments push up rate-hike expectations") up unemployment, naturally dampening price pressures. But employment, already at a record high, is actually going up, not down.

Fiscal support for households is also proving more generous than hoped and this excessive spending is adding to purchasing power, [weighing against the ECB’s](https://www.financedigest.com/ecb-weighs-bigger-rate-hike-with-safety-net-for-indebted-countries.html "ECB weighs bigger rate hike with safety net for indebted countries") restrictive policies.

The delayed passthrough of high production costs and a still-strong labour [market will sustain core inflation,”](https://www.financedigest.com/hungarys-booming-wedding-market-doused-by-soaring-inflation.html "Hungary’s booming wedding market doused by soaring inflation") Riccardo Marcelli Fabiani at Oxford Economics said.

With core inflation at record levels and likely [remaining high over the coming months](https://www.financedigest.com/6-months-to-go-until-brexit-and-investor-sentiment-remains-bold.html "6 months to go until Brexit and investor sentiment remains bold"), we expect the ECB to deliver two 50 basis point hikes in February and March and pause afterwards amid easing inflation and subdued economic trends.

Although [inflation may rise](https://www.financedigest.com/shares-rise-but-concern-mounts-over-inflation-flare-up.html "Shares rise, but concern mounts over inflation flare-up") again in January, the peak has probably passed and the ECB’s focus will start shifting to how quickly it will fall back.

[Markets and surveys are beginning to factor in the possibility that price growth will stay longer above 2% and even the ECB’s](https://www.financedigest.com/instant-view-ecb-sticks-with-big-rate-hike-even-as-bank-fears-roil-markets.html "Instant View: ECB sticks with big rate hike even as bank fears roil markets") own forecasts, which have proved overly optimistic over the past two years, do not see the bank hitting its target until late 2025.

The problem is that the longer inflation stays high, the more difficult it will be to tame it as [firms start adapting their pricing](https://www.financedigest.com/investors-warn-big-consumer-firms-over-price-hikes-as-competitors-gain.html "Investors warn big consumer firms over price hikes as competitors gain") and wage policies, perpetuating price pressures.

That is why the ECB [raised rates by a combined 2.5 percentage points](https://www.financedigest.com/how-to-raise-my-credit-score-40-points-fast.html "How to raise my credit score 40 points fast") last year – mirroring its global peers, even if somewhat later – and promised big hikes in both February and March that are set to take the deposit rate to around 3%.

We [expect the deposit rate](https://www.financedigest.com/ecbs-makhlouf-expects-50-bps-rate-hike-in-december.html "ECB’s Makhlouf expects 50 bps rate hike in December") to be at 3.25% in the spring, where it is likely to remain for some time thereafter,” Commerzbank’s Ralph Solveen said.

(Editing by Catherine Evans)


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