Another worryingly low inflation rate for the eurozone
PARIS — Consumer prices in the eurozone barely increased last month, raising fears of deflation and putting pressure on the European Central Bank to take further action.
Inflation in the 17 European Union member states that were using the euro in 2013 rose in December at an annual rate of only 0.8 percent, Eurostat, the EU statistical agency, reported Tuesday in a first estimate that will be subject to revision in the weeks ahead. The December figure, which did not include Latvia since it adopted the euro Jan. 1, was slightly lower than the 0.9 percent annual inflation rate for November.
The European Central Bank seeks to keep price growth steady at about 2 percent. The situation now, in which the rate of inflation is falling, is known as disinflation. If the situation continues in this direction, Europe could face outright deflation — a debilitating economic condition in which prices actually decline across the board. As long as hints of deflation remain, the ECB faces a difficult challenge.
Economists do not, for the most part, expect the ECB to take action when its Governing Council meets Thursday in Frankfurt, Germany. But the issue is certain to figure prominently in discussions between the bank’s president, Mario Draghi, and his colleagues.
Most worrisome to economists assessing the data released Tuesday is the “core” inflation rate, which strips out volatile food and energy prices. It dipped to 0.7 percent — a record low since the advent of the euro currency. The core number for December was equivalent to the broader, overall figure for October that led the ECB to cut its benchmark interest rate to a record low of 0.25 percent, down from 0.5 percent.
Clemente De Lucia, an economist at BNP Paribas, said Tuesday that the December consumer price data might have been affected by a change in the way Germany calculated its inflation, so another month or two might be needed to be certain of the trend.
“Yet, the level of inflation remains dangerously low,” he wrote in a note. “Survey data show that the recovery is gaining some momentum. Yet its pace will remain rather low and it needs to be sustained by policy maker actions.”
Data for all of the eurozone members is not yet available, but there is significant variation in price trends within the zone. Germany, for example, posted inflation of 1.2 percent in December. But Cyprus, hammered by the collapse of its financial industry, is already experiencing deflation, as prices slipped 2.3 percent in December.
Spain’s consumer prices rose just 0.3 percent, while Italy’s rose only 0.2 percent, as those two countries’ troubled economies teetered near a deflationary cliff.
Deflation would add to the broader economic malaise in the region, by hurting corporate profits and by leading consumers to delay purchases in anticipation of better deals in the future. It would also weigh heavily on borrowers, making loan repayments more expensive in real terms — a particular danger for Europe’s already fragile financial sector.