Falling Energy Prices Push Eurozone into Deflation

A long-anticipated move into deflation across the Eurozone occurred in December, with data showing that prices in the region were 0.2% lower on average than in December 2013.

The figure increases pressure on the European Central Bank (ECB), whose inflation target is below but close to 2%, to take further action to stimulate the bloc’s economy.

The fall was driven mainly by lower energy costs following a sharp fall in the price of oil. Energy prices in December were 6.3% lower than a year earlier. Once these are stripped out, December’s inflation rate for the eurozone was unchanged from November at 0.6%.

It is the first time the eurozone has experienced deflation since the depths of the financial crisis in 2009.

The ECB is increasingly expected to launch a new round of economic stimulus measures, or quantitative easing (QE), although Germany reportedly opposes further QE measures.

James Ashley, chief European economist at Capital Economics, described the latest data as footnote to the wider economic picture, and described arguments over whether inflation was just above or below 0%, and whether the tumbling oil was to blame as “specious”.

“The far more important question is why inflation is anywhere near 0% in the first place: in our view, the inconvenient truth for policymakers is that, in large part, it is a reflection of the failure of policy, both fiscal and monetary,” he added.

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