Europe’s deflation threat is intact in spite of the autumn European Central Bank’s autumn cut that took interest rates to a record low.
The European Union’s statistics office reported Tuesday morning that the euro zone zone’s annual inflation rate in December dipped to 0.8 per cent from the 0.9 per cent rate in November. The shock 0.7 per cent rate recorded in October triggered the last ECB rate cut.
The “core” inflation rate, which excludes typically volatile energy and food prices, was only 0.7 per cent in November. The ECB’s target rate is just under 2 per cent.
Economists said the new figure means the ECB will have to be especially wary about potential deflation – falling prices as opposed to slowing price increases – even if the bank is expected this week to leave rates as they are.
“Today’s figures show that it’s too early for the ECB to become complacent about deflation risks, especially in peripheral countries,” ING Financial Markets economist Peter Vanden Houte said in a note. “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.”
The problem for the ECB is that it is running out deflation-fighting ammunition. It could cut rates one more time, which would take them to zero. Negative deposit rates would be another option. That would see banks pay a levy on funds parked at the ECB.
Disinflation and deflation can be bad news for economies, especially ones, like the euro zone countries, that are struggling to find growth after long recessions. When inflation falls, consumers hold off buying expensive items, such as appliances, in the expectation that the items will become cheaper. Falling inflation also makes it harder for companies and households to reduce debt loads; they prefer to “inflate” their debt away.
The ECB’s public statements, however, give no hint that the bank fears outright deflation. In November, it said it expects a “subdued outlook for inflation extending into the medium term.” In an interview last month with Germany’s Der Spiegel, ECB president Mario Draghi said: “The crisis isn’t over, but there are many encouraging signs. We don’t have a situation as in Japan.”
One of those encouraging signs was reported Tuesday, when Germany’s statistics office said German unemployment fell in December for the first time in five months while retail sales climbed. The adjusted jobless rate remained at 6.9 per cent, near a record low.