Eurozone inflation jumped to 1.1% in December - ING

Bert Colijn, Senior Economist at ING, notes that the Eurozone inflation is rising and it will likely continue to do so in the coming months, but that does not mean that the ECB is getting behind the curve.

Key Quotes 

“Deflation fears look so 2016. In December, headline inflation increased from 0.6% to 1.1%, while core inflation increased moderately to 0.9% after months of stagnation at 0.8%. The signs for increasing core inflation had been there for a while already as unemployment has come down substantially over the past year and surveys show that businesses have started to increase selling prices over the past months.”

“But even though inflation increased substantially in December, this does not mean that the ECB is getting behind the curve. Most importantly, the increase in headline inflation will likely lose pace this year. Base effects in the energy component push up inflation in Q1, but this will likely end in the second quarter. That means that some downward pressure on the headline rate could emerge again in Q2.”

“In the longer run, it is crucial that core inflation strengthens further for the ECB to reach their inflation target. But core price pressures still seem to be building at a slow pace. Businesses have indicated that selling prices have increased since October, but for now this still seems to be consistent with core inflation below 1.5% throughout 2017. This makes sense given weak wage pressures, which are unlikely to become significant in the coming months as unemployment is still above the natural rate.”

“This means that the revival in Eurozone inflation is likely to lose pace in the course of 2017 as the energy effects fade out. While that is the case, the debate about the end of QE will only pick up in the coming months. The strong jump in German inflation to 1.7% this month will likely add to that as northern countries start to worry - possibly prematurely - about overheating.”