Inflation in the Eurozone reached 5% in December and closed the year with an average of 2.6%, exceeding the ECB’s target

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Updated Friday, January 7, 2022 – 12:31

In Spain, the CPI reached 6.7% in the last month of the year with an average inflation of 2.78%

A man buys in a store Alex CruzEFE

The prices continued to rise in Europe in the last month of the year leading the average inflation in the Eurozone up to 5%, the highest rate since 1985, compared to 4.9% that had been registered in November, according to the advance data published this Friday by the community statistics office, Eurostat.

If this information is confirmed, average inflation will have remained at 2.6% in 2021, six tenths above the 2% target that marks price stability according to the European Central Bank (ECB), but below the average in Spain, which stood at 2.78% after the CPI shot up to 6.7% in December. This led our country to be the one with the highest price increases among the developed countries, as El Mundo reports today.

By components, the energy it was the one that rebounded the most in December, 26%; followed by food, alcohol and tobacco (+ 3.2%), non-energy industrial goods (+ 2.9%) and services (+ 2.4%).

The underlying inflation -without having energy products or fresh food- was located in December in the 2.7%.

Once the December data was known, experts such as the economists of the British consultancy Capital Economics they think that in December the peak has been reached, but they see it difficult for underlying inflation – the most important for the ECB – to fall below 2% on average in 2022.

“We suspect that December was the peak of inflation in the euro zone (…). However, We believe that underlying inflation will average around 2%, no clear signs of a downtrend. Input price inflation remains extremely high and this will take time to transform into non-energy industrial goods inflation. And even though we do not expect an increase in wages to cause an acceleration of inflation services, if demand recovers quickly after restrictions are lifted and consumers become less cautious, experience suggests that labor shortage could intensify“, they point out.

Rate hikes in 2023?

As a result, they believe that there is a “increasing probability of the ECB starting to prepare the ground for modest interest rate increases in 2023 “.

Bert Colijn, Senior Economist for the Eurozone of ING, agrees that underlying inflation will be above 2% at least in the first half of 2022, although he is not so sure that the inflation peak has been reached.

“It depends largely on the evolution of gas prices, which have been incredibly volatile in recent weeks and a dominant factor in the recent surge in inflation. Still, given the current futures prices for natural gas and oil, energy inflation is likely to have peaked and a downward trend will set in from here. In addition to that, the effect of the German VAT, which raised inflation during the last month in December, will reduce general inflation by around 0.5% as of January “, he points out.

In his opinion, since there have been no second-round effects on wages yet, “the ECB still has time to see how quickly current inflation declines on the supply side throughout the year before making a decision on new shares. ”

The inflation data for this Friday was released after the minutes of the last meeting of the United States Federal Reserve (the Fed, their central bank), in which they already collect that they see “justified” to advance the rise in interest rates due to high inflation, which has triggered falls in the stock markets.

Ben Laidler, Global Markets Strategist for Multi-Asset Investing Platform eToro, believes that the peak of inflation “is near”, But remember that inflation is still below that of the US and that it will decline as supply chains relax.

“This makes the European Central Bank is reluctant to raise interest rates this year. It also maintains the weakness of the euro, a key support for the profits and exports of European companies, “he adds.

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