Eurozone Inflation: December Drop Keeps Rate Under 1 Percent

Source: http://epp.eurostat.ec.europa.eu/

Source: http://epp.eurostat.ec.europa.eu/

The Eurozone’s annual inflation rate declined in December, reigniting deflation concerns. The rate fell to 0.8 percent  from 0.9 percent in November, according to the Eurozone’s statistics office, Eurostat. The European Central Bank’s (or, ECB) target for inflation is just under 2 percent. The decline follows an uptick in November. Then, the rate increased from October’s four-year low of 0.7 percent to 0.9 percent. Even though the rate slightly increased, it is far from where it was in November 2012, when it stood at 2.2 percent.

In early December, the ECB explained it would keep an “accommodative” monetary policy “for as long as necessary, and will thereby continue to assist the gradual economic recovery in the euro area.” Its forward looking guidance, and expectation of low interest rates, “continues to be based on an overall subdued outlook for inflation extending into the medium term, given the broad-based weakness of the economy and subdued monetary dynamics.”

“Today’s figures show that it’s too early for the ECB to become complacent about deflation risks, especially in peripheral countries,” Peter Vanden Houte ING’s chief eurozone economist said. ”While we believe that for the time being the ECB will keep its monetary policy unchanged, not much is needed to push the central bank into action.” Reuters provided Vanden Houte’s remarks.

In a December interview with Der Spiegel, Mario Draghi, the President of the ECB, discussed inflation and deflation concerns for the Eurozone. Although the inflation rate was “already clearly below our 2 percent target,” with the potential to fall further, Draghi said the area was not witnessing deflation. ”But we must be very careful that we do not permanently fall below 1 percent inflation and thus into the danger zone.”

Draghi did not believe imminent action was called for, and that despite the signs, the Eurozone was not experiencing the kind of deflation seen in Japan during the 1990s. ”In the euro area, market participants are convinced that inflation will rise to close but below 2 percent again. In addition, Japan for a long time did not respond so resolutely in terms of its monetary policy as did the ECB. And finally, banks and companies in Japan were in a worse condition than those in the euro area today,” Draghi stated.

The rate compiles data from across the Eurozone, which varies wildly according to Draghi. He was asked about if the rate in Germany, which at the time was 1.3 percent, was normal and healthy. “Normal and healthy it is not. The real interest rate should be positive under normal conditions. Today in some countries it is negative, in others it is positive and even too high. We are very aware of the risks such fragmentation entails.” A full report, including individual member-state data will be released on January 16.

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