Eurozone inflation surges to 1.1% – highest in three years

Economy - Himanshu Gill - Jan 04,2017

Rating -

stars - based on 21 reviews

eurozone inflation surges to 1.1 percent highest in three years

Official figures show that inflation in the 19 countries’ Eurozone has surged to its highest rate in more than three years, largely due to increasing energy costs.

According to Eurostat, European Union’s statistics agency, annual inflation rate hit 1.1 percent in December, taking a leap from November’s rate of 0.6 percent. December's rate is the highest since September 2013, when inflation also had reached 1.1 percent.

The increase rate was much higher than expected. These figures are more likely to please policymakers at the European Central Bank (ECB) who have sought to get inflation toward the target of just below 2 percent by 2018 or 2019.

December’s increase was driven mainly by a surge in energy prices, which rose by 2.5 percent year-on-year in December, their first increase in over one year. Energy prices were mainly boosted by global oil cartel OPEC’s decision to cut output. Food, alcohol and tobacco prices rose 1.2 percent year-on-year, whereas services were also 1.2 percent more expensive than a year ago.

However, while the headline rate of inflation went up considerably in December, the core rate - which excludes prices of products such as energy and food that are driven by world markets - increased only modestly from 0.8 to 0.9 percent. Policy makers are worried that without a strong pickup of the core rate, acceleration in inflation won’t be sustained.

Another survey conducted by IHS Markit indicated that the Eurozone economy expanded at its fastest rate for more than five and a half years in December. The survey also suggested that output charges – price at which companies rate their goods - rose for the second month running and at the sharpest pace since July 2011.

It is expected that Eurozone government bond yields will also be affected by the upcoming bond issuance, as January is normally a hectic month for government borrowers.