Rising energy prices last year likely pushed the eurozone into recession. Inflation remains high and the economic climate remains subdued. However, the worst may soon be over. Decrease in inflation in December and a further improvement in economic sentiment late last year confirm our forecast that the eurozone economy could stabilize in the spring ahead of a potential economic recovery later this year. In addition, core inflation is declining. In particular, the index in the Eurozone declined for the second month in a row from 10.1% year on year in November to 9.2% in December. The figure is below the 9.7% expected by Reuters analysts. The decline in the overall index is associated with a further slowdown in energy price inflation, which fell to 25.7% year-on-year in December from 34.9% in November.

Inflation on food, liquor and tobacco continued to accelerate to 13.8% year-on-year in December from 13.6% in November. Core inflation, excluding energy, food, liquor and tobacco, rose to 5.2% year-on-year in December from 5.0% in November, posting stronger performance for both services and non-commodity energy manufactured goods . While much of the increase in base prices is an indirect consequence of higher production costs (especially for energy), inflation will nonetheless be above the ECB’s 2% target, even if that’s an impact. We expect inflation to ease significantly in 2023 thanks to a surge in 2022.

Inflation varies widely among eurozone members, ranging in December from 5.6% year-on-year in Spain to 20.7% in Latvia, where energy and food prices account for a large share of consumer spending. Inflation in France (6.7% yoy), which is less dependent on natural gas imports and where the government is actively intervening to keep energy prices down, remains much lower. However, rising gas and electricity prices and the elimination of fuel discounts are likely to boost it in January and February.

* Mr. Salomon Fiedler is an economist at Berenberg Bank.