LONDON – Lower energy costs kept a lid on inflation across the 19-country eurozone economy in December, official figures showed Tuesday, in a development that could buoy consumers but frustrate policymakers at the European Central Bank eager to see more substantial price rises.
In an initial estimate, the European Union’s statistics agency found that annual consumer price inflation held steady at 0.2 per cent. The rate was positive for a third month but was below market expectations for an increase to 0.3 per cent and far short of the European Central Bank’s target of just under 2 per cent.
Energy prices are the main cause for the subdued inflation, though their 5.9 per cent drop in December was the smallest decline since July. That’s because price levels are compared with a year earlier and much of the fall in oil prices occurred before then.
Analysts say oil prices may weigh on inflation even less in the next few months, helping the overall inflation rate to rise. Timo del Carpio, European economist at RBC Capital Markets, thinks inflation could rise to 0.8 per cent in January but conceded that “global political and economic uncertainties” could cause further volatility in oil prices.
Beyond the impact of energy prices, inflation remains subdued in an economy that is struggling to gain momentum — at least compared with the United States. The core inflation rate, which strips out the volatile items of food, energy, alcohol and tobacco, remained at a low 0.9 per cent in the year to December, with high unemployment across much of the eurozone keeping wage increases in check.
Low inflation is the main reason why the ECB has embarked on a series of stimulus measures over the past year. The worry is that low inflation becomes entrenched and turns negative as it has done at times over the past couple of years. Deflation can weigh on economic activity if consumers and businesses anticipate future price declines.
The ECB is clearly worried about that prospect. Last month, it extended its government bond-buying program and cut a key interest rate further into negative territory, measures it hopes will generate more economic growth and help get inflation back to target.
Analysts think the ECB may have to do more this year, especially if global economic headwinds hinder the eurozone. Recent jitters over the state of the Chinese economy, the world’s number 2, are one major reason for concern.
“We still think that the ECB was too timid in December and see it being forced to up the pace of its asset purchases before too long, perhaps in the second quarter,” said Jennifer McKeown, senior European economist at Capital Economics.