Euro-Area Inflation Outpaces Expectations as Oil Surges

Euro-area inflation accelerated in December at the fastest pace since 2013, suggesting that a debate about the appropriate degree of European Central Bank stimulus is about to gather momentum.

Consumer prices rose 1.1 percent from a year earlier, following a 0.6 percent gain in November, the European Union’s statistics office in Luxembourg said on Wednesday. That’s above a median forecast of 1 percent in a Bloomberg survey of economists. Core inflation, which excludes volatile items such as energy and food, increased to 0.9 percent last month.

The data follow the ECB’s decision to prolong quantitative easing to guarantee a sustained pickup in inflation in a year that could see economies hit by political uncertainty. Surprisingly strong accelerations of headline rates in Germany and Spain, mainly driven by a surge in the cost of oil, may strengthen the central bank’s focus on weakness in underlying price pressures as it assesses policy in coming months.

“It could certainly make for a tricky meeting in the first quarter and when the ECB presents staff projections in March, because by then we’ll have January and February inflation data which will very likely be higher than today,” said Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics Ltd in Newcastle. “The ECB has already preempted the situation by changing its focus to core inflation.”

Germany’s inflation rate unexpectedly jumped to 1.7 percent in December in the largest increase since European Union harmonized numbers were first published in 1997. Spain reported price growth of 1.4 percent, while Italy and France both saw inflation pick up for a second consecutive month, though at a slower pace.

The unexpectedly strong acceleration in both regional and national inflation rates follows a 12.6 percent surge in Brent crude last month. ECB President Mario Draghi said in December that price growth remained weak, even as Executive Board member Benoit Coeure told Boersen-Zeitung last week that inflation could face upside risks.

Bundesbank President Jens Weidmann, one of the ECB’s most hawkish officials, has argued in favor of a swift unwinding of stimulus once price growth allows, while Ifo President Clemens Fuest said in an interview published Tuesday the central bank may want to consider ending asset purchases as early as March.

The ECB extended QE last month until at least the end of 2017, while reducing the monthly pace to 60 billion euros ($63 billion) starting in April from the current 80 billion euros.

Euro-area inflation data come after a report showed that the region’s economy finished 2016 with the strongest momentum in more than 5 1/2 years. A composite Purchasing Managers’ Index climbed to 54.4 in December from 53.9 in November, with expansions in both manufacturing and services supported in part by a weaker euro, according to IHS Markit.

“There are several hawks on the ECB council who are bound to point to these numbers as an indication that the ECB shouldn’t be continuing its policy support, certainly shouldn’t continue buying such large quantities of assets right until the end of the year,” said Jennifer McKeown, chief European economist at Capital Economics in London. “But I think the consensus will be to continue to look through these increases. They are largely energy-related.”

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