Inflation in the Eurozone rose sharply in December, the European Commission has confirmed, adding further to pressure on the European Central Bank (ECB) to begin withdrawing its historically expansive monetary policy support on Thursday.
Consumer prices across the bloc increased by 1.1 per cent, a steep rise from the 0.6 per cent growth recorded the month before, according to Eurostat.
This marks the fastest increase in prices in Europe’s largest economy since July 2013.
Inflation tumbled after the 2011 debt crisis crippled large parts of the Eurozone’s economy, with deflation recorded at the start of 2015 and 2016
The doubling of the inflation rate within a month will add to pressure on the ECB to justify its stimulus measures. The bank meets on Thursday to decide monetary policy.
At its last Governing Council meeting in December the bank committed to an extension of its asset purchase programme, known as quantitative easing, until the end of this year, while slowing the size of monthly purchases to €60bn per month.
German policymakers in particular have been outspoken in their hawkish sentiments. German Bundesbank president Jens Weidmann has publicly criticised the policy, saying it should only be used as an emergency measure.
However, ECB president Mario Draghi has sought in recent public appearances to temper talk of a withdrawal of stimulus. More dovish members of the Governing Council are keen to avoid a repeat of the US “taper tantrum”, in which investors rushed to pull money out of bond markets, which had been sustained by the flow of money into fixed income from the Federal Reserve.
Howard Archer, chief UK and Europe economist at IHS Markit, said: "We suspect that the ECB will stress at its January policy meeting on Thursday that it is sticking to its current monetary policy course until it can be sure that the Eurozone is seeing a sustainable increase in Eurozone inflation to close to 2 per cent."
However, political concerns, particularly around elections in France, the Netherlands, and Germany, mean the ECB is unlikely to change course soon. This could mean a continuation of a European economy running at two speeds, as Germany powers ahead.
“Divergence between the major economies will be an important theme” in the coming year, said Claus Vistesen, chief Eurozone economist at Pantheon Macroeconomics. “Core inflation and wage pressures in Germany already are accelerating, but the inflation trend will stay more subdued in France, Italy and Spain.”
Strong increases in inflation in Germany’s powerhouse economy, have driven the headline Eurozone figure. It rose from an annual rate of 0.8 per cent in November to 1.7 per cent to end 2016, according to the German statistical agency.
The contrast is stark with other parts of the Eurozone, where deflation has taken hold, including in Bulgaria and Ireland.