FRANKFURT (AFX) - Euro zone inflation will slow in December owing to the sharp fall in the price of oil, economists said.
And December's decline in the headline inflation figure should herald a rapid decline in the inflation rate in 2001, with the figure seen dipping back under the ECB's 2 pct price stability ceiling in the coming months, they said.
However, core inflation could rise in December, they said.
Economists polled by AFX News are forecasting that the harmonised index of consumer prices (HICP) will show a year-on-year increase of 2.6 pct in December, down from November's peak figure of 2.9 pct.
Of 25 economists polled, 15 said they expect inflation to slow to 2.6 pct, while the other 10 forecast figures ranging from 2.4 to 2.8 pct.
The figures are due to be released today at 11.00 am London time. "Inflation fell in December as energy prices are coming down. We see it below 2 pct in June as energy prices are continuing to fall," said Julian von Landesberger at HypoVereinsbank.
Data from the leading members of the euro zone already point to a significant fall in area-wide inflation in December. German CPI inflation slowed to 2.2 pct in December from 2.4 pct the month before, while French inflation declined to 1.6 pct from 2.2 pct.
In the Netherlands inflation eased to 2.9 pct from 3.0 pct, while Spanish and Italian inflation remained unchanged at 4.0 pct and 2.7 pct respectively.
"Monthly changes in consumer prices were subdued in Germany, Italy, France and the Netherlands and should guarantee euro zone inflation dropping to 2.6 pct year-on-year," said Lorenzo Codogno at Bank of America.
In its January monthly bulletin the ECB said that the rise in energy prices was the main culprit behind the jump in euro zone inflation in November.
Since this pick-up in inflation was largely the result of oil price developments, the recent drop in the oil price will mean that inflation will slow in December, it said.
"The significant fall in oil prices and the pronounced appreciation of the euro which have occurred since late November should lead to a decline in annual consumer price inflation as from December 2000," it said.
However, some economists caution that, while the headline inflation rate has fallen, the core rate -- inflation stripped of food and energy prices -- has crept up.
Christoph Weil at Commerzbank expects euro zone inflation to come almost exclusively from core effects by the middle of the year and believes this will have implications for the ECB's interest rates. "We do not expect an interest rate cut if the core inflation rate expands in this way...the ECB has its hands tied," he said.
Bank of America's Codogno said that core inflation will continue higher for a few months due to the pass through of past rises in import prices.
"The December data will show a sharp contrast between a sizeable drop in headline inflation and a moderate rise in core data," he said. However, most economists believe that the fall in headline inflation below the 2 pct threshold will allow the ECB to make rate cuts this year.
They added that ECB president Wim Duisenberg will have little reason to repeat his mantra of pointing to upside risks to price stability in the euro zone in the latter part of the year.
Neville Hill at CSFB said he detected a softening in the ECB's language on inflation in the January bulletin. The report said that there were merely "elements" of upward risks to price stability which warrant monitoring, he noted.
"It (the bulletin) was more circumspect in pointing to risks on the upside...there are less and less pillars for Duisenberg to stand on," he said.
The main uncertainty clouding the inflation outlook concerns wage agreements in Europe.
Wage moderation will be helped by the situation in Germany, where several major industries made moderate pay deals last year that will not expire until 2002 at the earliest.
"The wage round is the main point of concern, but indicators are that this will not be a bad one," CSFB's Hill said.
However, Commerzbank's Weil said there have also been some signs of dangerously high wage settlements in the euro zone.
"They have been higher in the French public service, the Netherlands and in the German banking sector," he said.
"They (the ECB) will at least not want to make interest rate cuts while the wage negotiations are going on," said HypoVereinsbank's von Landesberger.