According to Eurostat, Eurozone inflation hit 1.1% last month, which is a sharp increase compared to November’s rate of 0.6% It is believed that this jump can be attributed to increased costs of energy, food, alcohol, and tobacco. This inflation rate is the highest that the Eurozone has seen in over three years; in September 2013, the rate was also 1.1%.
Energy prices rose by 2.5% year-on-year in December, which is their first increase in over a year. These prices were boosted by OPEC’s decision to cut oil output. Meanwhile, food, alcohol, and tobacco prices rose 1.2% year-on year. Even the smallest increases in the inflation rate have proven to have a wide variety of effects on market. In the Eurozone in particular, inflation could potentially push the European Central Bank (ECB) to stop its monetary stimulus, which has been prevalent in the region for almost three years now.
The increase is fortunately still under the ECB’s target of 2%. Another good sign is that the core rate, excluding inputs such as energy and food driven by world markets, only increased from 0.8% to 0.9%. Analysts hope that instead of possible deflation, the small increase in the core inflation rate means that this jump will be short-lived.
A separate survey conducted by IHS Markit showed that December saw the fastest economic growth for the Eurozone in more than five and a half years. The survey also noted that output changes rose for the second consecutive month and at the steepest pace since July 2011. These are all positive signs for the region as it was a concern in the past that the Brexit would negatively impact the Eurozone economy. Still, if prices rise faster than anticipated and ECB policies continue to be upheld, it is possible that currency could weaken due to eroded returns without rising rates.