More expensive fuel and food were behind a spike in eurozone inflation to 2.2 percent year-on-year in December, data showed, and price growth is likely to stay above the ECB's target for a few months more. The EU's statistics office Eurostat said on Friday inflation in the 16 countries using the euro in December rose 0.6 percent against November for a 2.2 percent year-on-year increase - as expected in a Reuters poll of economists.
"Headline inflation should remain around these levels until spring, printing 2.2-2.3 percent when energy price base effects begin to drag it back below 2 percent," said Eoin O'Callaghan, economist at BNP Paribas. "For the year as a whole we have a 1.8 percent average and the risks are to the upside given the persistent rally in soft commodities and oil prices," he said.
The data showed that more expensive fuels for transport were responsible for 0.58 percentage points of the final 2.2 percent rise while more expensive heating oil accounted for 0.19 percentage point and gas for 0.09 percentage point. Overall energy prices jumped 2.3 percent month-on-month in December, for an 11 percent annual gain. Excluding volatile unprocessed food and energy prices, inflation in December was 0.4 percent month-on-month and 1.1 percent year-on-year - the same as in November and October. The European Central Bank wants to keep price growth below, but close to 2 percent over the medium term.
It watches the measure that strips out energy and food prices - core inflation - to see if changes in the volatile elements translate into price growth in other sectors. European Central Bank Governing Council Axel Weber said on Friday inflation risks in the eurozone could well move to the upside and the now 17-member region's economic outlook has clearly improved.
The ECB kept interest rates on hold at a record low of 1 percent on Thursday, but said the eurozone faces short-term price pressures - taken by some in financial markets as a sign it could raise rates earlier than previously thought. "For the time being though, the ECB seems prepared to look through this inflation spike in the belief that it is being driven up by temporary factors and will fall back later in 2011," said Howard Archer, economist at IHS Global Insight.
He said the central bank would also take into consideration concerns about the eurozone's slow growth in light of tighter fiscal policy, high unemployment and sovereign debt risk problems. "For now there is little evidence of that, with core eurozone inflation still limited to 1.1 percent in December," he said. Separately, Eurostat said the eurozone swung into a small trade deficit in November from a surplus in October, defying market expectations of another surplus.
Imports rose 28 percent while exports jumped 24 percent year-on-year on a seasonally unadjusted basis, giving an external trade gap for the eurozone of 400 million euros, after a downward-revised surplus of 4.7 billion euros in October. Adjusted for seasonal swings, the deficit in November was 1.9 billion, after a 3.5 billion surplus in October, as adjusted exports rose 0.2 percent month-on-month and imports jumped 4.4 percent against October.