Consumer prices in the Eurozone slowed down in December. Although the markets were expecting to see a slowdown, the decline was in the books with inflation rate moving further away from the ECB’s target rate of 2.0%. This was according to the preliminary estimates released by the Eurostat.

The statistics agency’s flash inflation estimates released on Friday last week showed that consumer prices in the 19-country economic bloc rose just 1.6% on an annualized basis in December. This was a significant slowdown from November’s inflation rate of 1.9%.

The data also marked the second month of a slower pace of increase in consumer prices.

The decline in consumer prices came on the back of a sharp slowdown in the energy prices. However, on the plus side, the core measure of inflation remained relatively stable. The data indicated the volatility in the inflation data which also accounts for energy prices.

The decline in the inflation data was, however, more significant than expected. Economists polled forecast that consumer prices would rise 1.8% on an annualized basis in December.

December’s flash inflation estimates now push the headline CPI away from the target of 2.0%. The data gains significance as the central bank has ended its QE purchases in December 2018. Speculation is rife that the ECB will begin to hike rates by the second half of the year.

Unchanged interest rates

At the December monetary policy meeting, central bank officials maintained that they would keep interest rates at current levels at least until summer of this year, but the market expectations are that the central bank could keep rates unchanged for as much as 2020.

The decline in inflation could, however, complicate the central bank’s plans in this regard. The declines mark the sharp slump in international crude oil prices for the most of November and December, reflected in a slower pace of increase in inflation.

The December inflation data however cemented expectations that there could be no rate hikes this year. However, the declines come as ECB officials anticipated at previous meetings.

Still, there is a cause for concerns as the decline in consumer prices coincides with a slowing momentum in the economy for the Eurozone as well.

According to the ECB’s estimates, the inflation forecast was 1.8% for 2018 and should ease to 1.6% in 2019.

Following the release of the inflation data, remarks from governing council member, Benoit Coeure said that interest rates in the Eurozone would remain at low levels for as long as needed into order to push inflation to the ECB’s target rate.

Increase in consumer prices

As mentioned earlier, the slump in consumer prices correlates with the decline in energy prices. On an annualized basis, energy prices were down 5.5% in December, according to the flash estimates. This follows November’s increase of 9.1%.

The core inflation rate which excludes the volatile food and energy prices and a measure of inflation which is closely watched by ECB officials was steady at 1.1% in December. This lined up with the median estimates given by economists.

Another measure of inflation which also excludes alcohol and tobacco prices along with food and energy prices remained steady at 1.0% and was in line with the forecasts.

The release of the inflation data did not influence the euro currency much. However, bond yields slightly pushed higher.

The data come following the release of the flash inflation estimates from Germany. Data showed that Germany’s consumer prices touched an eight-month low in December. Consumer prices rose 1.7% on the year in December which followed November’s annual inflation rate of 2.3%.

This scored also below estimates as economists forecast consumer prices to increase by 1.9%.