FRANKFURT – Falling prices sent another worrying signal about the eurozone economy just before the European Central Bank starts at 1 trillion euro ($1.1 trillion) stimulus effort.
Consumer prices fell 0.6 per cent in the 12 months to January, accelerating the 0.2 per cent annual drop in December.
Prices are weighed down by the recent plunge in oil prices. But even excluding energy costs, they are weak, a sign of the deep economic malaise afflicting the 19 countries that share the euro currency.
Friday’s report by the Eurostat statistics agency showed that the core inflation rate, which strips out volatile food and energy prices, was at plus 0.5 per cent, down from 0.7 per cent the month before.
Falling prices have raised fears that the eurozone will fall into outright deflation, a trap that can paralyze the economy if it leads to falling wages and investment. Japan fell into deflation in the 1990s and is still trying to get out.
The European Central Bank is readying a massive 1 trillion euro stimulus program to try to raise inflation close to its goal of 2 per cent and to get the economy moving. The ECB plans to buy 60 billion euros per month in government and private-sector bonds using newly printed money, starting in March. That is aimed at driving down borrowing rates. It should also lift inflation simply by increasing the number of euros circulating in the economy.
“The sharp fall in inflation poses a risk to inflation expectations, which had already been under pressure due to the huge amount of slack in the economy and the slow pace of the recovery,” Christian Schulz, senior economist at Berenberg Bank, wrote in an email. “The ECB was thus more than justified in taking aggressive action earlier this month.”
“The multi-stimulus of cheap oil, a weak euro and aggressive monetary easing is now stabilizing expectations and will help the ECB reach its price stability target over time.”
Schulz said, however, that to fully benefit countries would have to take steps to make their economies more growth-friendly. That could include cutting burdensome rules on hiring and firing.
Meanwhile, jobless figures showed a slight improvement in December, with the unemployment rate falling to 11.4 per cent from 11.5 per cent the month before. The number of unemployed people fell by 157,000 in the eurozone.
The figures showed a wide diversity between countries. Germany, the eurozone’s biggest economy, had a jobless rate of only 4.8 per cent. Greece, still recovering from a crisis over too much government debt, had the highest at 25.8 per cent. Spain, working off a debt crisis that involved a real estate boom and bust, had a jobless rate of 23.7 per cent.
Greece’s new government has rejected the budget austerity course forced on the country as a condition of getting international bailout loans. But creditor countries led by Germany are insisting that it stick with its promises to restrain government spending and public jobs.