Euro area policymakers were reminded that their job is potentially not yet done as inflation ticked up in December for the first time since April, rising by half a percentage point. That said, the uptick was smaller than had been anticipated by the consensus of economists polled by Reuters, and core inflation continued to fall. A later start to the rate-tightening cycle has left European inflation higher for longer than in the US, implying a high likelihood that rates too will have to stay higher for longer. Moreover, the looming threat of a further adverse inflation shock from the shipping disruptions in the Red Sea is a definite worry — Fathom calculations suggest that, if disruptions escalate, this could add as much as five percentage points to euro area inflation. Resurgent inflation risks would test whether euro area policymakers have truly re-anchored inflation expectations and proved their credibility following the post-COVID inflation overshoot.
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