Weak eurozone inflation points up deflation risk

The latest inflation numbers for the eurozone suggest the region remains at risk of deflation.

In December consumer prices were up by 0.8 percent compared with the same month a year earlier.

November had seen a 0.9 percent increase, up from October’s 0.7 percent, which was a four-year-low.

A low or falling inflation rate is a bad thing because in the longer term it can deflate wages and demand, depressing economic growth.

The challenge for the European Central Bank is to avoid deflation as
well as support the single currency bloc’s recovery. Its target is
close-to-but-below 2 percent annual inflation.

“Today’s figures show that it’s too early for the ECB to become complacent about deflation risks, especially in peripheral countries,” said Peter Vanden Houte, ING’s chief eurozone economist, referring to the bloc’s weaker members.

ECB President Mario Draghi said last week he sees no signs of deflation or an urgent need for another interest rate cut.

Analysts see the ECB staying on hold at its rate-setting meeting on Thursday, while watching out for any action the bank may take in reaction to current low inflation environment.

However, reacting to the data, the euro did rise on speculation the ECB could consider more steps to support the economy.

Eurostat’s detailed inflation data breakdown for December, country by country, will be published on Jan. 16.