Going down - negative eurozone inflation in December poses problems for ECB

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Going down - negative eurozone inflation in December poses problems for ECB

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Normally prices going down is a good thing, but in the eurozone they are falling too far too fast, presenting a dilemma for the European Central Bank which fears a deflationary spiral leading to the economy contracting.

Eurozone inflation turned negative in December for the first time since 2009 and for only the second time since the euro was created in 1999.

Consumer prices in the bloc were 0.2 percent lower than they were in December 2013.

Cheaper energy was the biggest factor – down 6.3 percent and unprocessed food was 1.0 percent cheaper, outweighing a 1.2 percent rise in the cost of services. Oil prices have more than halved since June.

Core inflation, which excludes volatile energy and food prices, was stable at an annual 0.7 percent in December – the same level as in November and October.

The chief eurozone economist at ING Belgium, Peter Vanden Houte, says negative inflation helps some and hurts others: “Consumers will have more purchasing power so that’s a good thing but on the on the other hand one might say that with negative inflation wages will also be kept down and for indebted people this is less positive, so for the more in debt countries I would say that negative inflation is not such a good thing but you might say that low oil prices are definitely a boom for the economy.”

The problem for the European Central Bank is that deflation increases the debt burden of nations like Greece, which has seen prices falling further and faster than other eurozone countries, making it even more likely the ECB will start printing money to buy government bonds and stimulate the economy.

IHS Global Insight economist Howard Archer said the ECB would usually look through changes to inflation driven by oil. But December’s figure will leave the central bank “seriously concerned” that inflation expectations will weaken further, encouraging consumers to hold back purchases in the hope of even lower prices and so entrenching deflation.