Europe Economic Research17 January 2024J P M O R G A Nwww.jpmorganmarkets.comEconomic and Policy ResearchRaphael Brun-Aguerre(44-20) 7134-8308raphael.x.brun-aguerre@jpmorgan.comJ.P. Morgan Securities plc•Headline inflation up due to energy•Core continued to decline; the monthly pressure is soft•Higher taxes to lift consumer gas and electricity prices at the start of the year•We expect core to be closer to 2.5%oya by the summerEurostat�s final Euro area December HICP print came in line with the flash estimate. Looking at the broad picture, headline inflation increased 0.5%-pt to 2.9%oya and core inflation decline 0.2%-pt to 3.4%oya. The headline inflation increase was entirely driven by energy price inflation, up 4.8%pts to -6.7%oya. The strong rise in gas and electricity prices through late 2022 lifted inflation and lead to a powerful drag in 2023 which started to fade in December. Food price inflation meanwhile was down 0.8%-pt to 6.1%oya, and thus remained on a downward trend. The decline in core inflation finally was skewed toward core goods (down 0.4%-pt to 2.5%oya) while services price inflation was flat at 4.0%oya. Details were released for the first time today. Regarding the rise in energy price inflation, these details show that gas price inflation (+9.2%-pts to -15.5%oya) was the main driver (in particular the German government paid the whole gas bill for consumers in December 2022, leading to a drop in gas prices). Electricity price inflation meanwhile increased by a lesser amount (+1.1%-pts to -13.1%oya) and fuel price inflation increased 4.0%-pts to 1.2%oya. Within food, the inflation decline was skewed toward processed food (down 1.2%-pt to 5.9%oya), with unprocessed food price inflation up for the second consecutive month (+0.5%-pt to 6.8%oya). Global FAO prices have been on a downward trend, which should contribute to a further decline in Euro area food price inflation in the coming months. Today�s details are also important to assess inflationary pressures in the core basket. According to the ECB, seasonally adjusted core prices were up 0.23%m/m in December. However, interpreting these data is complicated due to the impact of HICP weight changes (a distortion largely linked to package holiday prices). Using today�s details, we estimate that weight changes lifted prices by 0.1%-pt in December (a smaller distortion than we expected). Thus, clean core prices were up 0.1%m/m sa according to our calculation. Getting a precise number is complicated as the German statistics office last year changed the way it records package holiday prices (monthly prices are now less volatile which makes any seasonal adjustment harder) but our overall sense is that inflationary pressures were on the weak side in December. Overall, the fading of core inflationary pressures was significant in recent quarters. During 4Q22-1Q23, our clean core...
