Inflation in the euro zone rose to 2.3 per cent in December as price hikes during the Christmas shopping season along with higher tobacco costs in Italy and Germany outweighed lower energy prices.

The first estimate from the European Union statistics agency Eurostat yesterday was in line with expectations of economists, who had anticipated a small inflation spike in the 12-nation single currency area after initial data from Germany and Italy.

The year-on-year inflation rate eased to 2.2 per cent in November from October's 2.4 per cent.

Higher taxes on tobacco boosted inflation in Germany and Italy, which account for nearly half of the euro-zone economy between them.

"If we look at what we know about the national data so far, one of the main contributions came from Italy and Germany, where there was a tobacco tax hike," said Mr Luigi Speranza, economist at BNP Paribas in London.

Although inflation moved further away from the European Central Bank's (ECB) aim of keeping it close to but below 2 per cent, the ECB is expected to keep interest rates unchanged at its next meeting on January 13th.

"What we are seeing is really that we are going sideways at the end of the year and, in the beginning of 2005, inflation is likely to go down as we get more favourable base effects," said Mr Jürgen Michels, analyst at Citigroup.

The strength of the euro and falling oil prices should contribute to the benign inflationary outlook.

ECB board member Ms Gertrude Tumpel-Gugerell said last week that interest rates were appropriate and there was no evidence that euro-zone inflationary pressure was rising, although there were risks to price stability in the medium term. - (Reuters)