Eurozone’s decreasing inflation sparks deflation worries

Inflation in the Eurozone has fallen – sparking fresh worries the economic bloc may face a period of deflation.

According to Eurostat, consumer prices had risen 0.8% in December from the previous year, down from 0.9% in November.

This figure is below the European Central Bank’s medium term target of nearly 2%.

It is also only slightly higher than the October low of 0.7%, which led ECB President Mario Draghi to cut its main interest rate to 0.25% – a record low which stunned the markets two months ago.

Further analysis

More worryingly, after stripping out the typically more volatile prices for energy and food, prices only rose by 0.7% in 2013.

That is the lowest rate of “core” inflation since January 2001 when records began.

Whilst placing additional pressure on the ECB to keep monetary policy fluid, it also means the central bank may have to consider supplementary stimulus measures to ensure against deflation.

However no changes to policy are expected at the ECB meeting taking place later this week.

Deflation risk

This data and the new record lows have fueled worries of a period of deflation within the Eurozone – a fall in prices for goods – when consumers expect prices to fall still further and consequently begin delaying purchases.

In addition, muted wage rises and increasing levels of unemployment within the bloc will mean a continual degradation of prices.

Adding to this is the fact the relatively high euro value has made imports into the Eurozone cheaper, while simultaneously increasing the price of exports.

Last week, ECB president Mario Draghi noted that there was neither the need for another rate cut or any signs that deflation would take place.

However, as ING’s chief Eurozone economist Peter Vanden Houte notes “today’s figures show that it’s too early for the ECB to become complacent about deflation risks, especially in peripheral countries.”

The sentiment was also echoed by BNP Paribas economist Ken Wattret, who has stated “there are multiple disinflationary forces still blowing in the Eurozone, and we expect more downward pressure” in the coming months.

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