Eurozone Consumer Prices Fall for First Time Since 2009, Adding to Deflation …

9 Jan 2015 | Author: | No comments yet »

Euro-Area Prices Fall More Than Forecast as Deflation Risks Gain.

The inflation rate in the euro area fell below zero for the first time in more than five years, bolstering the case for more European Central Bank stimulus.The figure, far short of the European Central Bank’s target of just under 2pc, is the latest pointer towards fresh intervention by the bank as it tries to prop up a sluggish economy.

The collapse in the cost of oil dragged eurozone consumer prices down 0.2 per cent in the year to December 2014, Eurostat, the commission’s statistics bureau, said on Wednesday. The ECB will meet on January 22 to consider whether to go beyond its existing stimulus measures and start buying sovereign bonds in a programme of quantitative easing.

ECB officials are working on a plan to buy government bonds as they strive to prevent a deflationary spiral of falling prices and households postponing spending, a risk President Mario Draghi has said can’t be “entirely excluded.” They may use a gathering today to weigh options for a quantitative-easing program that may be announced at their Jan. 22 policy meeting. “Inflation will most likely fall even further in January and remain extremely low all year long,” said Evelyn Herrmann, European economist at BNP Paribas SA in London. “We expect the ECB to announce a broad-based asset-purchase program including government bonds.” Joblessness in Italy rose to a record 13.4 percent in November, separate data showed. The inflation figures follow German data on Monday showing that the currency bloc’s biggest member had experienced inflation of just 0.1pc in December, down from 0.5pc in the previous month and short of forecasts of 0.2pc. Central bankers usually ignore the impact of falling oil prices on inflation and the lower price of crude is expected to boost growth in the region by encouraging people to spend more.

Consumer prices are falling on an annual basis in Spain and Greece (GKCPIUHY), while data yesterday showed inflation in Germany at 0.1 percent, its weakest since 2009. But inflation in the currency area has been less than 1 per cent for more than a year and that extended period of weak price pressures has raised questions about the credibility of the ECB’s pledge to keep inflation below but close to 2 per cent.

Mario Draghi, ECB president, has said policy makers will act “without delay” to raise inflation and longer-term inflation expectations back towards the target. Core euro-zone inflation, which strips out volatile items such as energy, food, tobacco and alcohol, increased to 0.8 percent year-on-year in December. While Draghi has warned of a dis-anchoring of inflation expectations and signaled support for QE, Bundesbank President Jens Weidmann favors not acting at this time, arguing that the drop could be a “mini-stimulus package.” ECB Chief Economist Peter Praet told Germany’s Boersen-Zeitung last month that in an environment in which inflation expectations are “extremely fragile,” officials cannot “simply look through” the slide in energy costs.

Since June, the ECB has cut interest rates twice, offered cheap long-term loans to banks to jumpstart lending and started a purchase program for asset-backed securities — a decision Weidmann and German Executive Board member Sabine Lautenschlaeger opposed. “If you look at past experience we’ve taken major monetary-policy decisions in a situation where there was no unanimity,” Draghi said after the ECB’s Dec. 4 meeting. “So this is what we have to keep in mind.”

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