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07 January 2015

European Voice: Eurozone economy enters deflation


In spite of all the warnings and the predictions to the contrary, the eurozone economy slipped into deflation in December, according to estimates published by Eurostat 7 January.

It estimated that inflation in the eurozone in December was -0.2%, dragged down in particular by falling oil prices. Energy costs fell by 6.3% in December.

The reading will put further pressure on the European Central Bank (ECB) to launch fresh monetary measures and in particular a programme of quantitative easing. Its next decision-taking meeting is scheduled for 22 January.

Under such a programme, trialled successfully by the central banks of the United States, Japan and the United Kingdom over the last few years, the ECB would buy up government bonds, injecting money into the eurozone economy with the aim of pushing up growth and inflation.

The ECB’s mandate instructs the central bank to maintain inflation “close to, but below” 2%. Inflation in the eurozone fell to around 0.5% in June 2014 and has hovered at that level since.

Nonetheless, Mario Draghi, the ECB president, has repeatedly argued that the eurozone is not at risk of deflation.

The fear is that the eurozone will enter a so-called deflationary spiral, where consumers hold off on spending in expectation of more price falls, leading the economy to contract and prices to fall further. Japan has struggled to escape from deflationary pressures that began in the 1990s.

Full article on European Voice (subscription required)



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