Euro Zone Officially in Deflation

Written by | Friday, January 9th, 2015

Inflation in the single currency area has officially turned negative as Eurostat numbers have shown, with last month’s prices being lower by 0.2 percent compared to December 2013. It is the first time since the financial crisis in 2009 that the Eurozone has experienced deflation. The fall in prices was mainly driven by cheap energy, mostly by the plummeting price of oil. If energy prices were excluded, the Eurozone’s rate of inflation would have been 0.6 percent, the same as in the November 2014. Last month’s prices of food, alcohol, and tobacco were estimated to be the same as in 2013 after rising by half a percent in November this year. In contrast, prices for services went up by 1.2 percent compared to 2014.

The estimate calculated by Eurostat, the chief statistical office of the European Union, will be updated later this month. According to James Ashley of Capital Economics, “the far more important question is why inflation is around zero percent in the first place”. He thinks that the number simply reflects the failure of policy – both fiscal and monetary. Howard Archer of IHS Global Insight commented that the new inflation figure was “dire news for the ECB”.

The official tip into deflation is indeed very bad news for the European Central Bank (ECB), which is already under pressure to start its quantitative easing (QE) by buying government bonds. December inflation data is expected to cement these expectations despite Germany’s fierce opposition. Berlin thinks that the ECB should not start buying government bonds of Eurozone’s periphery economies, which have not yet fully recovered from their bailout programs. In Greece, for instance, deflation will increase the debt burden, which has already become the most important point on the pre-election agenda for all political parties.

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