Consumer prices in the euro-zone rose at the slowest pace since August in December, while German economic expectations improved far more in January than predicted, bringing welcome news for the area's policy makers.
Figures published by the European Union statistics agency Eurostat showed consumer prices were up 2.7% from December 2010. This was a decrease on November, when prices rose by 3% on an annual basis. Consumer prices rose 0.3% on a monthly basis, compared with 0.1% in November.
The calculation of the annual rate of inflation was revised from the preliminary estimate of 2.8% published earlier this month.
The slowdown will be welcome news for the European Central Bank, and is likely the beginning of a sharp retreat for inflation, which economists expect to fall below the 2% target rate in around six months' time. The slower pace of inflation also gives ECB President Mario Draghi more room to support the economy by cutting rates further this year as the debt crisis rumbles on in the region, with little sign of a credible conclusion being reached soon.
"We expect euro-zone consumer price inflation to be back below 2% before mid-2012," said Howard Archer, chief euro zone and U.K. economist for IHS Global Insight. He said he expected the ECB to cut interest rates further, by 0.25 percentage point to 0.75% before the end of the first quarter.
Expectations for a slowdown in inflation stem from the ongoing rise in unemployment across the euro bloc, the increasing likelihood of recession and only a slow recovery this year as well as energy prices rising at a much slower pace than in 2011. And, without a timely resolution to the ongoing debt crisis, and specifically Greece's major fiscal problems, that outlook is unlikely to change significantly in the coming months.
The slowdown wasn't uniform across the single currency region. While German, Spanish and Greek annual rates of inflation slowed by either 0.5 or 0.6 percentage points in France inflation rose 2.7% on the year, unchanged from November.
Economic expectations for the continent's powerhouse, Germany, improved far more in January than predicted, as improved U.S. economic data, falling Spanish and Italian government bond yields and the European Central Bank's generous supply of liquidity gave rise to optimism, the Center for European Economic Research, also known as ZEW, said Tuesday.
The widely watched ZEW index rose in January for the second consecutive month after declining for nine months in a row on the deepening of Europe's sovereign debt crisis.
The economic expectations index rose to minus 21.6 in January from December's minus 53.8. Experts had expected a rise to minus 49.5 for January. The last time the reading was this high was in July 2011.
The current conditions index rose to plus 28.4 from December's plus 26.8. Experts had forecast a reading of plus 30.1 for January.
The data suggest the German economy may stabilize over the next six months instead of earlier expectations for a deterioration, ZEW said. A very mild recession is still on the cards for Germany for the first half of this year, however, as the debt crisis remains a risk to economic growth, ZEW President Wolfgang Franz said in a news release.
Euro-zone energy prices, meanwhile, rose 9.7% on the year in December, down from a 12.3% increase in November and a 12.4% rise in both October and September.
Other measures of consumer price inflation across the region excluding volatile items remained at a lower level. Core inflation, which excludes prices of energy, food, alcohol and tobacco, rose 0.4% on the month in December and by 1.6% on the year, unchanged from the annual pace reported for the last four months.
And, excluding just tobacco prices, consumer price inflation rose 0.3% on the month and by 2.7% on the year in December, down from a 3.0% annual gain in November.
In the wider European Union consumer prices, meanwhile, rose 0.3% on the month in December and were 3.0% higher from a year ago.
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