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Eurozone deflation accelerates to record low

02 February 2015, 16:20 CET
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Eurozone deflation accelerates to record low

Photo © benjaminnolte - Fotolia

(BRUSSELS) - Eurozone consumer prices fell by a record 0.6 percent in January, EU data showed Friday, confirming deflation could be taking hold and putting pressure on a historic bond-buying plan by the ECB to deliver.

The drop from minus 0.2 percent in December appears to back the European Central Bank's decision last week to launch a bond-buying spree to drive up prices.

Plummeting world oil prices were largely to blame for the fall in the 19-country eurozone, already beset by weak economic growth and high unemployment, the EU's data agency Eurostat said.

"The ECB was thus more than justified in taking aggressive action earlier this month," said Christian Schulz of Berenberg Bank.

The -0.6 inflation rate matches the same record drop in prices the eurozone set in July 2009 at the worst of the global financial crisis.

But the European Commission cautioned that core inflation, which strips out highly fluctuating components like energy, still remained in positive territory.

"If you look at core inflation, which we consider to be a better measure of the underlying price pressure, that still remains positive at 0.6 percent," said commission spokeswoman Annika Breidthardt at a news conference.

But even at the level, core inflation remained well below the ECB's official inflation target of near two percent.

"Falling prices today and alarmingly pessimistic expectations of where prices are heading in the future proves beyond all reasonable doubt it was high time (for the ECB) to act," Richard Barwell, senior European economist at Royal Bank of Scotland Group told Bloomberg.

- Energy prices sink -

With fears of deflation increasing, the ECB last week finally decided to embark on a quantitative easing programme involving the purchase of 1.14 trillion euros ($1.29-trillion) in sovereign bonds.

In a deflationary spiral, businesses and households delay purchases, throttling demand, triggering recession and causing companies to lay off workers.

The move comes as the eurozone faces renewed worries from Greece, after the anti-austerity Syriza party came to power in elections with a promise to renegotiate the country's debts.

Energy prices in the eurozone, which added Lithuania on January 1, sank a huge 8.9 percent in December, greater than an already steep fall of 6.3 percent a month earlier.

Oil prices have plummeted in recent weeks, as OPEC maintains its production levels despite weak demand.

- Unemployment at 11.4% -

There was better news on the unemployment front in the eurozone as the jobless rate fell to at 11.4 percent in December, its lowest level since August 2012.

The fall in unemployment from 11.5 percent in November and 11.8 percent a year before gave some cheer, even if it still higher than before the eurozone debt crisis.

There were 18.13 million unemployed across the eurozone in December, 157,000 less than in November and 693,000 less than a year before.

But sharp contrasts between northern and southern EU countries remained.

Unemployment in Germany remained at a super low 4.8 percent, with Austria just behind with 4.9 percent.

But debt crisis countries still fared far worse, with Greece at 25.8 percent in October, the latest data available, and Spain at 23.7 percent.

However, in heavily indebted Italy unemployment fell to 12.9 percent from a record high of 13.3 percent, offering a much needed sign of recovery to reform-minded Prime Minister Matteo Renzi.

At 23 percent in December, youth unemployment remained a huge problem in the eurozone, though lower than the 23.9 percent of a year ago.

Last month, Germany had the fewest job seekers under the age of 25, at 7.2 percent.

Youth unemployment in Spain stood at a huge 51.4 percent, 50.6 percent in Greece and 42 percent in Italy.

Despite those high levels, Schulz of Berenberg Bank said trends showed promise.

"Labour market reforms continued to pay off in Germany, Spain or Portugal, where unemployment is falling rapidly. Where reforms have not happened (yet), progress was limited or absent," he said.

Euro area annual inflation down to -0.6% [Eurostat]

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