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Deflation is new worry in eurozone

WEDNESDAY, JAN. 8, 2014

LONDON – The pressure on the European Central Bank to ease monetary policy further in coming months ratcheted up Tuesday after figures showed underlying inflation in the eurozone fell to a record low.

Eurostat, the EU’s statistics office, said inflation across the 17 EU countries that used the euro in December fell to 0.8 percent, as expected, from 0.9 percent the month before. The ECB is tasked with setting monetary policy to keep price inflation just below 2 percent.

Perhaps the most notable aspect of Tuesday’s figures was that the core rate, which excludes energy, food, alcohol and tobacco, fell to an all-time low of 0.7 percent. That may raise concerns that the eurozone may face a period of deflation, a protracted fall in prices that chokes off consumer spending and business investment.

“In our view it is the soft ‘core’ inflation print that is the main item of news in this report,” said James Ashley, senior economist at RBC Capital Markets. “It constitutes the weakest reading on record (back to 1990) and reflects a marked slowdown in services price inflation.”

An outright fall in prices remains a possibility, partly because wage increases are muted due to high unemployment. The relatively high value of the euro, meanwhile, has made imports cheaper at the same time as making exports more expensive.

Some countries, notably Greece, are already seeing falling prices, a development that may make its debt servicing even more difficult.

Most economists think the ECB will keep its monetary policy unchanged at its meeting Thursday even though inflation is well below its target.


 

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