The European Union’s statistics agency said that consumer prices in January 2015 were 0.6% lower than in January 2014.


Dow Jones/Paris


Consumer prices in the eurozone fell more sharply and more broadly in January, heightening the risk of a slide toward deflation that the European Central Bank hopes to halt and then reverse through its new bond-buying programme.
The European Union’s statistics agency said on Friday that consumer prices were 0.6% lower than in January 2014, having fallen 0.2% on an annual basis in December. The decline in prices was the largest since July 2009.
The plunge in consumer prices is unlikely to have an immediate effect on the ECB policies. Last week, the ECB said it would purchase €60bn ($68bn) in public and private debt securities each month, mostly government bonds, starting in March and lasting until September 2016 in a bid to bring inflation closer to the bank’s 2% target.
Still, the longer consumer prices persist in negative territory, the more pressure the ECB will eventually come under to extend the purchase programme. Officials have said it won’t end until they are confident that inflation is on track to reach their objective.
The programme “will end only once we get a strong sense that inflation is converging toward 2%,” ECB executive board member Benoit Coeure said in an Italian newspaper interview this week.
Economists now estimate prices could continue to fall until the third quarter, and possibly for longer.
“Headline inflation could remain negative during most of this year,” said Sonali Punhani, an economist at Credit Suisse. “Even though cyclical indicators are turning in the euro area and the ECB QE program was more positive than expected, the pass through to inflation is likely to come with a lag.”
The latest drop in inflation was driven largely by falling energy prices, but also by declining prices for manufactured goods as businesses passed on some of the savings they have made on their energy bills. Food prices also fell, while prices of services rose more slowly than in recent months.
The core rate of inflation excludes items such as food and energy, whose prices are largely determined by global demand and supply, and beyond the influence of the ECB. It fell to 0.6% from 0.7% in December.
This trend will worry ECB policy makers, who want to prevent the fall in oil prices having “second-round effects” as other businesses cut their prices to gain market share and workers settle for lower pay rises. The ECB worries that households and businesses will grow accustomed to falling prices, and postpone some spending decisions in anticipation of a better deal later in the year, in turn leading to falls in output and further drops in prices.
European Commission spokeswoman Annika Breidthardt Friday said the eurozone is not in deflation, defined as broad-based, cross-country price declines which are “self-perpetuating.”
Breidthardt, said the January figure was “still driven by a year on year decline in energy prices,” which may increase consumers’ disposable income.
“It’s therefore not what the Commission considers outright deflation,” she said.
Beyond the threat of a deflationary spiral, the decline in prices could, on the other hand, help boost consumer spending power in the near term, to the extent that falling prices are driven by lower energy costs.
There is mounting evidence that households are increasing their spending on goods and services other than energy. Figures from France also released on Friday showed household spending rose by 1.5% in December, three times faster than economists had expected. While retail sales rose less sharply in Germany – by 0.2% from the previous month – that increase followed two months of strong rises. Compared with December 2013, sales were up 4%.
A bounce in consumer spending aided an acceleration in Spain’s economy during the fourth quarter, statistics institute INE said on Friday. The eurozone’s fourth-largest economy grew 0.7% in the three months to December, compared with the previous quarter, INE said. That is equivalent to an annual pace of growth of 2%, INE added. In the third quarter, it had posted 0.5% growth from the earlier period.
However, consumer spending continues to be restrained by high levels of unemployment. Eurostat on Friday said that the jobless rate fell to 11.4% in December from 11.5% in November, with 157,000 people finding work during the month. While that was the lowest rate of unemployment since August 2012, it remained near the post-crisis peak of 12%, and much higher than in the US, Japan or the UK.
At the same time, falling prices makes debt burdens heavier to bear, pushes up inflation-adjusted borrowing costs, and slows the rebalancing of the eurozone economy, making the legacies of Europe’s long debt crisis even harder to escape.
To regain competitiveness and reduce foreign debts, countries such as Spain need inflation rates below Germany’s. But if German inflation is negative, then debtor countries need sharply negative inflation. That makes their private and public debts – whose value in euros stays the same, even if prices and incomes fall-harder to pay down.
Europe’s strategy for ending its debt crisis relies on generating enough growth through supply-side economic overhauls, and through a hoped-for but so-far elusive confidence boost from austere fiscal policies, for debtor nations to pay down high debts to more moderate levels.
That strategy has already tested by the lack of growth in recent years and growing signs of fraying voter support for the established political parties that are following the policy. Greece’s new government under left-wing party Syriza is partly a result of public frustration at the inability of countries to escape from under crushing debts despite massive belt-tightening.
If inflation falls deeper into negative territory and gets stuck there, it would raise even more doubts about whether eurozone debtor countries can recover without restructuring their debt that would spread more of the cost of cleaning up Europe’s crisis to creditor nations such as Germany.



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