Euro zone under deflation threat as prices fall

Consumer prices in the euro zone hit their lowest level in over five years in December on cheaper energy prices, according to a flash estimate released by Eurostat, the European Union's statistical office.

The inflation for December for the 18-nation bloc was -0.2 per cent, compared to the same month a year ago and significantly lower than the 0.3-per cent inflation recorded in November.

The previous negative inflation of -0.1 per cent was recorded in October 2009, when the global economy was reeling under the financial crisis.

The figure is well below the comfort zone of 2 per cent over the medium term as targeted by the European Central Bank (ECB). Euro zone inflation has been in ECB's danger zone of below 1 per cent for the past 14 months.

The ECB is concerned that a prolonged, very low or negative inflation could cause deflation, as consumers may refrain from spending in anticipation of even lower prices resulting in a stagnant economy and higher government debt.

It is believed that the negative inflation will put pressure on the ECB on its sovereign bond purchase programme announced in September to stimulate the euro zone economy.

The negative rate for euro area inflation in December is driven by a 6.3-per cent fall in energy prices compared to last year, Eurostat said.

Excluding volatile energy, prices for food, alcohol and tobacco and non-energy industrial goods remained stable, after rising 0.5 per cent in November.

Only the cost of services are estimated to register a rise of 1.2 per cent compared to last December.

Eurostat is expected to come out with its final inflation figures by the middle of the month.

With oil prices falling below $50 a barrel, inflation is likely to remain negative for the next few months, according to some analysts.

ECB's key interest rate is already at a record low of 0.05 per cent, and the bank is likely resort to quantitative easing (QE) - printing more money - to increase lending and liquidity.

The prospect of QE has driven the euro further down hitting a new 9-year low of $1.815 on Wednesday.

A decision is expected soon, as ECB officials are scheduled to meet on 22 January.

In a New Year interview with German daily Borsen-Zeitung, Peter Pret, the ECB board member for economics hinted that ECB could decide to buy only triple-A-rated bonds or allow each central bank to carry out purchases at its own risk.

However, such a move could undermine the guiding principles of solidarity among member states, it is perceived.

Germany, Europe's biggest economy, opposes any monetary easing as it feels that the German government will be at risk of funding other struggling economies of the euro zone such as Greece, Italy, Portugal, Spain and Ireland.

Euro zone has been witnessing tepid economic growth and high unemployment in the past several quarters.

Job data for November released yesterday by Eurostat indicate 11.5-per cent unemployment across the euro zone, same as in October, but slightly lower compared to last year's 11.9 per cent. For the wider 28-nation EU the unemployment is 10 per cent.

Among the member states, the lowest unemployment rates in November 2014 were recorded in Austria 4.9 per cent and Germany 5 per cent, and the highest in Greece 25.7 in September and Spain 23.9.