Eurozone inflation jumped on higher energy costs, according to Reuters

FRANKFURT (Reuters) – Eurozone inflation accelerated in December, an unwanted but expected bump that is unlikely to derail further interest rate hikes from the European Central Bank.

Inflation in the 20 countries that share the euro rose to 2.4% last month from 2.2% in November, Eurostat said on Tuesday, in line with expectations in a Reuters poll of economists, boosted by more expensive energy and stiffer higher service prices.

Inflation has recently been hovering above the ECB’s 2% target and data over the next few months is likely to remain subdued, but the overall trend is expected to point downward.

The central bank has cut interest rates four times in the past year and said the target is now in sight, so further policy reforms are on the way, although the pace and timing are open to debate.

Underlying inflation, an indicator of the sustainability of price growth, has held steady, possibly prompting calls for the ECB to be cautious about removing policy restrictions in the coming months.

Excluding food and energy, which fluctuated by 2.7%, price growth and the closely followed services segment, the largest item in the consumer price basket, rose from 3.9% to 4.0%.

Adding to the issue of caution, a separate consumer survey from the ECB showed near- and medium-term inflation expectations rising, with the figure three years ago at 2.4%, up from 2.1% in the previous survey and the ECB’s

After data from Spain and Germany pointed to the trend, markets’ expectations for December inflation are unlikely to overtake current rate cut bets and investors are still holding out for further cuts on January 30.

But it is not fully expected to reduce at each meeting until June, investors have seen a 50% chance that the ECB will skip a meeting once in the first half. A 3% deposit rate will be seen hitting 2% by the end of the year.

One reason for the more cautious market prices is that the recent strengthening of the dollar is driving imports of key commodities, including auto fuel, which is rapidly becoming more expensive with more expensive energy.

The dollar could rise further if the new US administration implements trade tariff proposals, an impact that is not just a one-off and does not warrant policy action.

When it comes to fundamental trends, even the most hawkish members of the ECB’s Governing Council seem to agree that inflation is largely under control and that the target is within reach.

Economic growth is weak, the labor market is softening, and recent wage deals have resulted in a major slowdown in income growth, the single biggest factor in consumer price pressures.

Unemployment held to a record low of 6.3% in November, separate data showed on Tuesday, but the pace of new hires slowed sharply and surveys of the labor market suggest it has been slowing for months.