Euro zone falls deeper into deflation on lower oil prices

The collapse in oil prices has helped to push the euro zone deeper into deflation, strengthening the case for the European Central Bank’s landmark decision to begin buying government bonds later this year to stave off a serious bout of falling prices in the region.

Prices dropped 0.6 per cent in the year to January, a figure on a par with the lowest reading recorded since the 18-country currency area's creation, according to Eurostat, the European Commission's statistics bureau. The flash estimate is the same as the record low recorded in July 2009, during the the sovereign debt crisis.

Energy costs, which make up about a 10th of the basket of goods used to measure inflation, had tumbled 8.9 per cent over the past year on the back of a near 60 per cent fall in the price of Brent crude.

The core measure of inflation, which strips out more volatile goods such as food and energy, slowed to a new record low of 0.6 per cent, down from 0.7 per cent in December. The dip in core inflation is concerning as the measure is seen as better reflection of the weakness of domestic demand.

Both estimates will bolster support for the ECB’s quantitative easing package, unleashed by policy makers earlier this month.

Government debt

The ECB will buy €60 billion worth of government debt, asset-backed securities and corporate bonds a month from March until September 2016 to counter a prolonged bout of deflation that threatens to wipe out the region’s stuttering economic recovery.

The fear is that falling prices will prompt consumers to delay purchases, denting already weak demand.

Deflation also exacerbates high debt burdens in parts of the region’s periphery.

Monetary policy makers have said they will keep buying until inflation is headirng towards the central bank’s target of below but close to 2 per cent.

But the fall in oil prices could spur growth in the region by lifting spending on other goods. That appears to have happened in Spain, the region's fourth- largest economy, which is growing at its fastest pace in seven years despite prices falling by 1.4 per cent in the year to January.

German retail sales figures, also out yesterday, suggested falling oil prices had boosted consumption – though not by as much as expected. A rise in retail sales of 0.2 per cent between November and December missed expectations of a bigger spending surge in the eurozone’s largest economy.

Spending up

In

France

, the region’s second-largest economy, consumer spending by volume rose by 1.5 per cent as lower energy costs boosted the amount of energy and food bought by households.

But economists fear the high unemployment rate in the eurozone will constrain prices. The region’s unemployment rate remained high at 11.4 per cent, down just 0.1 per cent from November, according to Eurostat figures published yesterday. That is more than double the US jobless rate.

– (Copyright The Financial Times Limited 2015)