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Economic fears rise as Europe sinks into deflation

TUMBLING oil prices have helped drag the Eurozone into deflation for the first time in more than five years, heaping further pressure on the European Central Bank (ECB) to start printing money.

Inflation in the bloc turned negative last month, with consumer prices falling by 0.2pc year-on-year, sparking fears that the region could enter a prolonged period of deflation.

It has also raised expectations that data due to be released here will show inflation also dipping into negative territory on an annual basis.

Oil prices briefly slipped to below $50 per barrel yesterday for the first time since May 2009, but recovered in the afternoon.

Most economists now expect the Frankfurt-based ECB to embark on some form of quantitative easing when the Governing Council holds its first meeting of 2015 on January 22.

Alan McQuaid of Merrion Stockbrokers expects Irish data due out next week to show inflation in negative territory.

“The big issue is on 22 January there will be every chance that there will be quantitative easing, but whether that works, I have my doubts,” Mr McQuaid told the Irish Independent.

“If the ECB is serious about tackling low inflation, they’d be better off giving every household in the Eurozone €20,000 and say ‘spend it’.

“It will be far more effective in getting inflation up and boosting people’s confidence.

“One of the key issues that has helped is that the euro has weakened dramatically.”

The European statistics office Eurostat said in a first estimate yesterday that prices in the Eurozone in December were 0.2pc lower than a year before, after rising 0.3pc in November. The last time Eurozone inflation was negative was in October 2009, when it was -0.1pc.

Core inflation, which excludes volatile energy and food prices, was stable at an annual 0.7pc in December – the same level as in November and October.

But energy prices plunged 6.3pc and unprocessed food was 1pc cheaper, outweighing a 1.2pc rise in the cost of services.

Oil prices have more than halved since June.

In the Eurozone’s history, inflation has only once before fallen below zero, and that was in 2009, when it stayed at that level for five months.

“Is there a serious deflationary issue, I think the numbers will suggest that there’s a problem there, but do I think there’s a major issue, no because I don’t think people are going to start postponing buying things,” Mr McQuaid added.

“I don’t think that mindset has set in yet.”

Economists say a decision to launch such bond-buying could be made at the ECB’s next meeting, although ECB president Mario Draghi will have to overcome opposition from Germany’s Bundesbank that could curb the scope of any programme.

To complicate matters, Greek voters go to the polls on January 25 in parliamentary elections which are widely expected to boost the support of left-leaning anti-austerity party Syriza.

Some analysts believe that the election could complicate any announcement by the ECB.

“Hello deflation,” said Holger Schmieding, economist at Berenberg Bank in London. “Even if we do not share the widespread concerns about dangerous deflationary dynamics,” the ECB is “miles away” from its goal of near 2pc (inflation), he said.

Article Source: http://tinyurl.com/kbwqb42

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