Eurozone inflation drop prompts fears of deflation

ECB President Mario Draghi (GETTY IMAGES)

The threat of deflation in the eurozone was back on the radar of the European Central Bank after figures showed a surprise slowdown in the cost of living to 0.8 per cent in December.

THE threat of deflation in the eurozone was back on the radar of the European Central Bank today after a surprise slowdown in the cost of living to 0.8 per cent in December.

ECB president Mario Draghi, who stunned markets with an interest rate cut to a record low of 0.25 per cent in November, is struggling to reflate the eurozone economy to hit an inflation target of close to 2 per cent.

The Consumer Prices Index fell below 1 per cent for the first time in almost four years last October.

The latest figures come two days before ECB rate-setters announce their first policy decision of the new year.

Draghi last week said there was no urgent need for another rate cut, but added that it was vital to avoid inflation getting permanently stuck below 1 per cent.

 Today’s slowdown came despite the lower cost of energy, unchanged in December after a 1.1 per cent fall in November, falling out of the figures. Services inflation also slowed.

In Germany headline inflation has slowed to 1.2 per cent, but in struggling Spain it is 0.2 per cent and Greece is in outright deflation territory with prices 2.9 per cent below a year earlier.

ING Bank economist Peter Vanden Houte said: “Today’s figures show that it’s too early for the ECB to become complacent about deflation risks, especially in peripheral countries.

“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.”