Eurozone tips into deflation

7th January 2015

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The eurozone has dipped into deflation for the first time since 2009 with prices in December down 0.2% compared to a year earlier.

The news that inflation has turned negative will put pressure on the European Central Bank to take further steps to boost the economy.

The fall in prices was largely driven by lower energy costs following plummeting oil prices.

Excluding the 6.3% fall in energy prices, December’s eurozone inflation figure would have been the same as November’s at 0.6%, as food, alcohol and tobacco costs remained stable.

Ben Brettell, senior economist at Hargreaves Lansdown, said: “Following Monday’s news that German inflation slipped to a five-year low of 0.1%, today’s figures for the eurozone as a whole showed the currency bloc has slipped into deflation for the first time since 2009. Consumer price inflation for the twelve months to December came in at -0.2%, down from +0.3% in November and undershooting economists’ consensus forecast of -0.1%.

“The news heaps near-irresistible pressure on Mario Draghi to inject further monetary stimulus when the ECB meets on 22 January. Draghi has so far refrained from full-blown quantitative easing, in the face of stiff opposition from Germany. The markets have been concerned about outright deflation for months, and as such a failure to launch QE two weeks tomorrow would almost certainly be received badly.”

Brettell added: “A significant portion of the fall in inflation can be attributed to the plummeting price of oil, which dropped below $50 a barrel yesterday. This could prove positive for the euro zone economy, as lower fuel costs increase consumers’ disposable incomes. However, if deflation becomes entrenched and consumers begin to expect prices to fall, it can be dangerous. Spending decisions will be deferred in expectation of lower future prices and economic stagnation could result. Deflation is particularly worrying in the euro zone given the high levels of indebtedness in many member states, as falling prices increase the real value of debt.”

Brettell said that there is a silver lining for investors.

“Quantitative easing programmes in the US, UK and Japan have sparked dramatic rallies in those countries’ stock markets, and the same would likely be the case for European stocks. However, with QE expected to weaken the euro, this could offset gains in sterling terms for those based in the UK.”

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