More ECB action likely as Eurozone CPI misses expectations

Eurozone's consumer prices increased at a higher rate in December than earlier, signalling that it is more difficult for the European Central Bank to boost inflation than policy makers had expected.

Consumer prices in December were 0.2% higher than a year earlier, in line with November's inflation rate but analysts expected a pick of 0.3%.

Looking at the main components of euro area inflation, food, alcohol & tobacco is expected to have the highest annual rate in December (1.2%, compared with 1.5% in November), followed by services (1.1%, compared with 1.2% in November), non-energy industrial goods (0.5%, stable compared with November) and energy (-5.9%,compared with -7.3% in November).

"The weakness of food inflation may have been a temporary response to unseasonably warm weather. And with energy inflation set to rise further, we see the headline rate increasing steadily to around 1% over the next six months or so", says Capital Economics in a research note. 

With GDP expanding at a slower pace, the economic spare capacity is expected to continue to exert downward pressure on core inflation. While the high jobless rate has kept wage growth very subdued - private sector hourly labour costs rose by just 1.4% y/y in Q3. 

The ECB seems too nervous in December and it will be forced to raise the pace of its QE probably in Q2.