The Zhitong Finance App learned that inflation in the Eurozone accelerated. The CPI rose 2.4% year on year in December, up from 2.2% in November, mainly driven by energy costs. This data supports the ECB's policy of gradually lowering interest rates, but it has not completely changed its interest rate policy position. Despite a recovery in inflation, the bond market's reaction was lackluster, and expectations of interest rate cuts remained stable.

Specifically, the rise in inflation in December was mainly driven by the first rise in energy costs since July. At the same time, the core inflation rate after excluding volatile components was 2.7%, and the price increase in the service sector also rose slightly to 4%.

Figure 1

The ECB has warned many times before that the recovery in the inflation rate is not surprising, and Bloomberg's economic forecast shows that the inflation rate will remain at 2.4% in January.

After the data was released, German two-year treasury yields fell slightly to 2.18%, slightly lower than the previous day's high, and bets on the ECB's interest rate cut expectations remained stable.

Jamie Rush, chief European economist at Bloomberg, pointed out that most of the increase came from the base effect of fuel prices, and the overall situation is stilldeflationIt is expected that the ECB will continue to cut interest rates by 100 basis points this year.

Furthermore, recent reports released by various countries show that price increases in Germany and Spain exceeded expectations, while France fell short of expectations, while Italy unexpectedly slowed. An ECB report also showed that consumer inflation expectations increased in November.

Despite a recovery in inflation, ECB officials plan to continue to reduce borrowing costs, and the 3% deposit interest rate is seen as a limiting factor in economic activity.

Figure 2

In terms of interest rate cutting strategies, most people support “gradual” interest rate cuts, that is, cutting interest rates by one-quarter percentage point each time. However, a few members of the Governing Council, including Bank of France Governor François Villeroy de Gallo, insisted that the option of cutting interest rates more drastically must be retained.

Although the inflation rate fell below 2% last year, this is mainly due to the statistical effect of large fluctuations in energy costs in recent years. As these effects gradually subside, the overall inflation rate is likely to pick up temporarily. However, concerns about inflation in the service sector remain.

Over the past year, the inflation rate in the service sector has been hovering around 4%. This is mainly due to rising wages, and wages play a greater role in the service industry than in other industries. The ECB doesn't think this situation will continue. Workers' wage growth slowed in the third quarter, and early indicators showed that the job market was weakening.

Figure 3

Notably, this may not be the last time energy prices have risen, and Europe's gas reserves are being consumed faster than at any time in the past seven years as cold weather intensifies heating demand.

Meanwhile, incoming US President Trump plans to levy extensive trade tariffs, which may impact the Eurozone economy, and the impact on inflation depends on various factors.

In response, Dutch Bank Governor Klaus Nott warned that if Trump keeps his promises, Chinese goods may enter Europe at lower prices, exacerbating Europe's deflation woes.

In summary, inflation in the Eurozone accelerated in December, mainly driven by energy costs, but the overall economic environment is still facing deflationary pressure. The ECB plans to continue cutting interest rates to stimulate the economy, but rising energy prices and uncertainty about trade tariff policies have added variables to the Eurozone economic outlook.