Euro zone enters deflation as consumer prices fall

Plunging energy costs have caused consumer prices in the euro zone to fall annually for the first time since 2009, official figures showed.

It is a development that is likely to reinforce market expectations that the European Central Bank will soon provide an aggressive monetary stimulus.

In its flash estimate of inflation, Eurostat, the EU's statistics agency, said consumer prices in the 18-country eurozone were 0.2 per cent lower in December than the previous year. The decline was bigger than anticipated. The consensus in markets was for a 0.1 per cent fall.

The main reason behind the slide from the 0.3 per cent inflation rate recorded in November was the plunging oil price, which has been most noticeably been passed on to consumers at the pump.

The fact that lower oil costs were the main factor behind the fall in prices is evident in the fact that the core rate, which excludes volatile items such as food, tobacco and energy, actually rose to 0.8 per cent from 0.7 per cent.

Still, many in the markets think the ECB will back a government bond-buying programme on the lines of those that have been pursued by other central banks over the past few years, such as the US Federal Reserve and the Bank of England.

That expectation has weighed heavily on the euro, which hit a new nine-year low of $1.1848 on Wednesday as traders price in the prospect of more euros in circulation.

ECB president Mario Draghi has hinted lately that something could be announced soon to deal with the subdued price pressures in the eurozone. The ECB meets next on January 22.

“These really are desperate times for the eurozone with the monetary bloc finally slipping into deflation,” said Dennis de Jong, managing director of UFX.com.

“Draghi can’t afford to sit on his hands any longer and the introduction of a bond-buying quantitative easing programme later this month now looks increasingly likely.”

PA