Eurozone CPI rebounds to 2.4% in December, European Central Bank may keep interest rate cuts unchanged.

The inflation in the eurozone accelerated in December, with the year-on-year CPI rising by 2.4%, higher than November's 2.2%. This was mainly driven by energy costs, supporting the European Central Bank's gradual lowering of interest rates policy, but not completely changing its stance on interest rate policy. Despite the increase in inflation, bond market reactions were muted, and expectations of rate cuts remained stable. Specifically, the rise in inflation in December was mainly driven by the first increase in energy costs since July. At the same time, the core inflation rate, excluding volatile components, was 2.7%, and service sector prices also rose slightly to 4%. The European Central Bank had previously warned that the increase in inflation rate was not unexpected, and Bloomberg's economic forecast shows that the inflation rate will remain at 2.4% in January. After the data was released, the yield on German two-year government bonds slightly fell to 2.18%, slightly below the previous high, and bets on the European Central Bank's rate cut expectations remained stable. Jamie Rush, Chief European Economist at Bloomberg, pointed out that most of the increases were due to the base effect of fuel prices, and the overall situation is still deflationary. It is expected that the European Central Bank will continue to reduce interest rates by 100 basis points this year. In addition, recent reports from various countries showed that inflation rates in Germany and Spain exceeded expectations, while France was below expectations, and Italy unexpectedly slowed down. A report from the European Central Bank also showed that consumer inflation expectations rose in November. Despite the slight increase in inflation, European Central Bank officials still plan to continue lowering borrowing costs, with the 3% deposit rate seen as a factor limiting economic activity. In terms of the rate cut strategy, most people support a gradual rate cut of a quarter point each time. However, a few members of the governing council, including Franois Villeroy de Galhau, Governor of the Bank of France, insist that the option of larger rate cuts must be retained. Although the inflation rate fell below 2% last year, this was mainly due to the statistical effects of significant fluctuations in energy costs in recent years. As these effects gradually fade, the overall inflation rate may temporarily rise. However, concerns about inflation in the service sector still exist. For more than a year, the inflation rate in the service sector has been hovering around 4%, mainly due to wage increases, with wages playing a larger role in the service sector than in other industries. The European Central Bank believes that this situation will not continue. Wage growth for workers slowed in the third quarter, and early indicators show that the job market is softening. It is worth noting that the increase in energy prices may not be the last, as the consumption of natural gas reserves in Europe is faster than at any time in the past seven years due to intensified heating demand in cold weather. Meanwhile, the incoming US President Trump plans to impose a wide range of trade tariffs, which could impact the eurozone economy, with the impact on inflation depending on various factors. In response, Klaas Knot, President of the Dutch Central Bank, warned that if Trump fulfills his promises, Chinese goods may enter Europe at even lower prices, exacerbating Europe's deflationary plight. In conclusion, inflation in the eurozone accelerated in December, mainly driven by energy costs, but the overall economic environment still faces deflationary pressure. The European Central Bank plans to continue lowering interest rates to stimulate the economy, but rising energy prices and the uncertainty of trade tariffs policy have added variables to the economic outlook of the eurozone.