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Eurozone inflation lingers near zero despite ECB boost

06 January 2016, 16:00 CET
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Eurozone inflation lingers near zero despite ECB boost

Photo © benjaminnolte - Fotolia

(BRUSSELS) - Eurozone inflation remained lower than expected in December, official data said on Tuesday, adding pressure on the European Central Bank to once again ramp up its efforts to boost the economy in Europe.

ECB president Mario Draghi disappointed markets last month with a limited bid to revive the struggling eurozone given near-zero inflation levels across the 19 countries that share the euro.

The EU's Eurostat statistics agency said inflation was unchanged in December at a moribund 0.2 percent, lower than analysts' forecast of 0.3 percent inflation for the period.

This is well below the ECB's official target of near or just below 2.0 percent and signals that successive waves of ECB action to jolt prices higher in Europe are so far ineffective.

"The failure of Eurozone inflation to pick up in December is good news for consumers' purchasing power, but it will maintain ECB concern that prolonged very low inflation could lead to a renewed weakening in inflation expectations," said Howard Archer, Chief European Economist for IHS Global Insight.

Inflation in December was again dragged down by energy prices, led by oil, but this drop slowed sharply to 5.9 percent annually instead of 7.3 percent the previous month, the data showed.

Core inflation, which strips out fluctuating energy prices as well as alcohol and tobacco, remained stable at 0.9 percent from November.

- 'Too timid' -

Analysts warned that oil prices were again on a downward track and could push eurozone inflation into negative territory down the road.

"With the oil price languishing below $40, headline inflation looks set to remain low in the months ahead. Unless oil prices rise, headline inflation might even briefly dip below zero again in the Summer," said economist Teunis Brosens of ING Bank in the Netherlands.

Central bankers of the 19-member eurozone are eager to fight falling prices because they can be poisonous for the economy, creating a vicious circle of falling demand and fewer jobs.

Draghi in December announced an interest rate cut that was less than investors had expected and held back from expanding the size of its bond-buying stimulus.

Critics said that action was too weak to counter deflationary pressures on the euro area economy, but ECB executive board member Yves Mersch last week said policy-makers have "by no means used up all our ammunition".

While falling prices might be a short-term good for consumers, deflation can endure dangerously if consumers delay purchases in the hope of lower prices later, which in turn prompts companies to hold off investment.

"In all, then, we still think that the ECB was too timid in December and see it being forced to up the pace of its asset purchases before too long," said Jennifer McKeown, Senior European Economist at Capital Economics.

Euro area annual inflation stable at 0.2% [Eurostat]

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