Eurozone deflation deepens in January

European Union

The eurozone has descended further into deflation this month with prices falling 0.6%, the fastest pace for more than five years amid tumbling global oil prices.

The annual drop in prices across the single currency bloc was bigger than economists had been expecting and matched a record fall set when the eurozone was mired in recession in July 2009.

The January drop of 0.6% follows annual deflation of 0.2% in December and was worse than a forecast for a 0.5% fall in a Reuters poll of economists. Even without including the effect of falling oil prices, so-called core inflation dropped further in January, fuelling fears the European Central Bank’s €1.1tn (£730m) money-printing programme may have come too late to stave off a downward spiral in prices.

The figures, an early “flash” estimate, from the European statistics office showed core inflation, which excludes the effect of volatile items like food, alcohol, tobacco and energy, edged down to 0.5% this month from 0.7% in December.

Economists said the numbers supported plans unveiled by the ECB to pump €1.1tn into financial markets in an attempt to tackle deflationary pressures and prevent the fragile eurozone economy from grinding to a halt, as slumping prices encourage businesses and consumers to put off spending. But there were fresh questions over whether the €1.1tn quantitative easing will be enough.

“Today’s inflation numbers fully vindicate the ECB’s decision to embark on QE. That said, QE will not raise inflation in the coming months. Unless oil prices stage a quick recovery, the energy component will keep headline inflation well below zero in the months ahead. But the key number to watch in the coming months is core inflation. Any further falls may raise concerns that QE has come too late to stave off deflation,” said Teunis Brosens at ING Financial Markets.

The ECB aims to keep inflation just under 2% and the bank’s chief Mario Draghi has said the money-printing programme would continue “until we see a sustained adjustment in the path of inflation”.

Separate numbers showed a marginal improvement in the eurozone labour market in December, with unemployment edging down to 11.4%, defying economists’ expectations for it to hold at November’s 11.5% rate. It was the lowest since August 2012.

The statistics office, Eurostat, said unemployment was lowest in Germany (4.8%) and Austria (4.9%), and highest in Greece (25.8% in the most recently available figures from October 2014) and Spain (23.7%).

• This article has been amended after a correction to official figures was issued by Eurostat. Estimated core inflation - the rate excluding energy, food, alcohol and tobacco - was 0.6% in January, not 0.5% as previously stated.

Powered by Guardian.co.ukThis article was written by Katie Allen, for The Guardian on Friday 30th January 2015 12.54 Europe/London

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