Euro zone inflation falls unexpectedly in January

Euro zone consumer price inflation dropped in January, bucking market expectations for a rise, mainly due to a sharp fall in energy costs and complicating the European Central Bank’s task of supporting the region’s fragile economy.

Consumer prices in the 18 countries sharing the euro rose by 0.7 per cent year-on-year in the first month of 2014, down from 0.8 per cent in December, data from the EU’s statistics office Eurostat showed today.

Inflation last touched the 0.7 per cent level in October, which was the lowest inflation reading for the single currency in nearly four years. Economists polled by Reuters expected consumer price inflation to accelerate slightly to 0.9 per cent in January, a level that is still well below the ECB’s target of close to but below 2 per cent.

The drop in January was prompted by a 1.2 per cent fall in the highly volatile price of energy, which was flat in the previous month. The cost of food, alcohol and tobacco products were up by 1.7 per cent on the year.

Although ECB president Mario Draghi said in January deflation was not threatening the euro zone, a number of countries are already suffering deflation and the International Monetary Fund warned deflation was a potential risk.

The ECB, which cut its key interest rate to a record low of 0.25 per cent in November, is expected to stay put until mid-2015 unless money market rates rise and the euro strengthens. In Germany, Europe’s largest economy, consumer prices fell by 0.7 per cent on the month, keeping the annual inflation rate steady at 1.2 per cent, with both figures coming below expectations. (Reuters)