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| Eurozone Consumer Prices Fall for First Time Since 2009, Adding to Deflation Fears | Eurozone Consumer Prices Fall for First Time Since 2009, Adding to Deflation Fears |
| (about 2 hours later) | |
| PARIS — Consumer prices fell in the eurozone for the first time since the global financial crisis in 2009, data released on Wednesday showed, putting more pressure on the European Central Bank to act to prevent a downward price spiral that could undermine economic growth for years to come. | |
| Consumer prices in the eurozone contracted 0.2 percent in December compared with a year earlier, according to a preliminary report from Eurostat, the European Union’s statistics agency. Even before the recent collapse in oil prices, inflation in the region had been falling amid slack spending by consumers and businesses, which makes it difficult for companies to raise prices. | Consumer prices in the eurozone contracted 0.2 percent in December compared with a year earlier, according to a preliminary report from Eurostat, the European Union’s statistics agency. Even before the recent collapse in oil prices, inflation in the region had been falling amid slack spending by consumers and businesses, which makes it difficult for companies to raise prices. |
| A single month of falling prices does not meet the classical definition of deflation — a widespread, self-sustaining decline in prices that is considered even more debilitating than runaway inflation because it is difficult to reverse. But because Wednesday’s data was the first to show prices actually turning negative, a problem that economists have been warning of for more than a year, it underscored many experts’ argument that European policy makers have underestimated the threat of the sort of long-term stagnation that afflicted Japan two decades ago. | |
| “The eurozone is suffering from a profound malaise,” said Simon Tilford, deputy director of the Center for European Reform in London. “It’s already in a deflationary trap of the kind we saw in Japan in the 1990s, but it’s less well equipped than the Japanese to deal with it,” he added, citing the institutional challenges of managing a 19-country currency bloc. | |
| A separate report from Eurostat showed that the eurozone jobless rate was unchanged at 11.5 percent in November. For the 28-nation European Union, the unemployment rate was 10 percent, down from 10.1 percent in October. | A separate report from Eurostat showed that the eurozone jobless rate was unchanged at 11.5 percent in November. For the 28-nation European Union, the unemployment rate was 10 percent, down from 10.1 percent in October. |
| In Germany, the eurozone’s biggest economy, unemployment dipped to 6.4 percent in December, down from 6.5 percent the previous month. But in the second- and third-largest eurozone economies, France and Italy, the jobless rates climbed. Italian unemployment rose to a new high, 13.4 percent. | |
| Taken together with recent statements by Mario Draghi, the president of the European Central Bank, the latest inflation data will further heighten expectations that the central bank will announce aggressive measures when it meets in Frankfurt on Jan. 22. Analysts expect the central bank to say it is ready to begin effectively printing money that it would use to buy eurozone government bonds. | Taken together with recent statements by Mario Draghi, the president of the European Central Bank, the latest inflation data will further heighten expectations that the central bank will announce aggressive measures when it meets in Frankfurt on Jan. 22. Analysts expect the central bank to say it is ready to begin effectively printing money that it would use to buy eurozone government bonds. |
| The question now is whether any weapon in the European Central Bank’s arsenal can be powerful enough to address the eurozone’s fundamental problem — a dearth of demand by European businesses and consumers for goods and services and an unwillingness by eurozone countries to stimulate growth through government spending. | |
| Officials still appear to be “in denial” about the gravity of the problem, Mr. Tilford said. “Unfortunately, the longer they postpone meaningful action, the larger the policy response will need to be.” | Officials still appear to be “in denial” about the gravity of the problem, Mr. Tilford said. “Unfortunately, the longer they postpone meaningful action, the larger the policy response will need to be.” |
| Wednesday’s Eurostat reports reinforce the impression that Europe’s economy could be heading back toward recession, as the pace of growth is insufficient to restore the moribund labor market or create inflationary pressure. The eurozone economy expanded just 0.6 percent in the third quarter on an annualized basis, and recent data suggests that the pace has slowed in recent months. | |
| The bloc’s currency, the euro, which has plunged in value recently against the dollar, fell again after the inflation report, declining more than 0.5 percent to $1.1824 — its lowest level in nine years. | |
| European stocks rose, though, with the benchmark Eurostoxx 50 index up 1.2 percent through midafternoon trading. The price of Brent crude, the European benchmark, touched below $50 on Wednesday for the first time since 2009 amid a continuing rout in the oil markets, spurred by a glut of supply and by fears of a slowdown in global economic growth. | |
| Consumer prices in the eurozone had not contracted on an annual basis since October 2009, as the global financial crisis was ebbing. The December rate was down from a 0.3 percent increase in November, already far below the European Central Bank’s target of holding inflation close to, but below, 2 percent. | Consumer prices in the eurozone had not contracted on an annual basis since October 2009, as the global financial crisis was ebbing. The December rate was down from a 0.3 percent increase in November, already far below the European Central Bank’s target of holding inflation close to, but below, 2 percent. |
| Unemployment in the eurozone, which expanded to 19 members this month with the entry of Lithuania, peaked at 12 percent in 2013. The dismal labor market has weighed on consumer spending. | Unemployment in the eurozone, which expanded to 19 members this month with the entry of Lithuania, peaked at 12 percent in 2013. The dismal labor market has weighed on consumer spending. |
| Economists fear that unemployment could rise again if the eurozone succumbs to deflation. When deflation takes root, consumers tend to delay purchases because they expect prices to fall further. Corporate profits sag, and companies are forced to dismiss workers. Deflation also raises the cost of servicing loans in real terms, putting stress on borrowers and pressure on their lenders. | Economists fear that unemployment could rise again if the eurozone succumbs to deflation. When deflation takes root, consumers tend to delay purchases because they expect prices to fall further. Corporate profits sag, and companies are forced to dismiss workers. Deflation also raises the cost of servicing loans in real terms, putting stress on borrowers and pressure on their lenders. |
| Japan’s experience in the 1990s showed that traditional monetary instruments are largely ineffective with nominal interest rates at zero. | |
| Well before eurozone consumer prices tipped below zero, the region’s worrisomely low inflation had been raising alarms among economists. | |
| International Monetary Fund economists warned early last year that the difference between ultralow inflation, which they called “lowflation,” and outright deflation was mainly a matter of degrees, as the weak price pressures could “scupper the nascent recovery and pressure the most fragile countries.” Deflation would be particularly painful for eurozone members like Spain and Greece, which would be hobbled in their efforts to increase competitiveness relative to Germany. | International Monetary Fund economists warned early last year that the difference between ultralow inflation, which they called “lowflation,” and outright deflation was mainly a matter of degrees, as the weak price pressures could “scupper the nascent recovery and pressure the most fragile countries.” Deflation would be particularly painful for eurozone members like Spain and Greece, which would be hobbled in their efforts to increase competitiveness relative to Germany. |
| The so-called core rate of inflation, which excludes volatile energy and food costs, rose 0.8 percent. While falling oil prices help push down the overall inflation rate, the lower fuel prices are a boon to consumers, creating demand in an economy that economists expect to grow only a little more than 1 percent this year. | The so-called core rate of inflation, which excludes volatile energy and food costs, rose 0.8 percent. While falling oil prices help push down the overall inflation rate, the lower fuel prices are a boon to consumers, creating demand in an economy that economists expect to grow only a little more than 1 percent this year. |
| Mr. Draghi, the central bank president, said last week that the risk of deflation “cannot be ruled out completely, but it is limited.” But he added, “If inflation remains low for a long time, people might expect prices to fall even further and postpone their spending.” | Mr. Draghi, the central bank president, said last week that the risk of deflation “cannot be ruled out completely, but it is limited.” But he added, “If inflation remains low for a long time, people might expect prices to fall even further and postpone their spending.” |
| “We are not there yet,” Mr. Draghi said in an interview with the German newspaper Handelsblatt. “But we need to tackle this risk.” | “We are not there yet,” Mr. Draghi said in an interview with the German newspaper Handelsblatt. “But we need to tackle this risk.” |
| Many economists expect the central bank to undertake an unconventional policy similar to the so-called quantitative easing used by the Federal Reserve to stimulate the American economy after official interest rates were already effectively at zero. | Many economists expect the central bank to undertake an unconventional policy similar to the so-called quantitative easing used by the Federal Reserve to stimulate the American economy after official interest rates were already effectively at zero. |
| But quantitative easing is a divisive issue in Europe because of questions about how the European Central Bank would allocate bond buying among the 19 countries of the eurozone, and who would pay if a government defaulted on bonds held by the central bank. | But quantitative easing is a divisive issue in Europe because of questions about how the European Central Bank would allocate bond buying among the 19 countries of the eurozone, and who would pay if a government defaulted on bonds held by the central bank. |
| Some analysts expect the central bank to wait until March to start a bond-buying program, to allow more time to work out these problems. | Some analysts expect the central bank to wait until March to start a bond-buying program, to allow more time to work out these problems. |
| Expectations that the Federal Reserve will move this year toward reining in ultralow interest rates in the United States even as the European Central Bank prints more money have helped push the euro to its lowest levels against the dollar in years. | Expectations that the Federal Reserve will move this year toward reining in ultralow interest rates in the United States even as the European Central Bank prints more money have helped push the euro to its lowest levels against the dollar in years. |
| Investors have also been snapping up government bonds of eurozone countries amid expectations that European Central Bank action will make them more valuable. Yields on German, French and Belgian bonds have all hit record lows this week. | Investors have also been snapping up government bonds of eurozone countries amid expectations that European Central Bank action will make them more valuable. Yields on German, French and Belgian bonds have all hit record lows this week. |
| “Normally, when inflation expectations are as catastrophically low as they are right now in the eurozone, macroeconomic policy would be set aggressively to counteract that,” Mr. Tilford of the Center for European Reform said. “They need a two-pronged policy: full-blown quantitative easing by the central bank, and an expansionary fiscal policy by governments to boost demand.” | “Normally, when inflation expectations are as catastrophically low as they are right now in the eurozone, macroeconomic policy would be set aggressively to counteract that,” Mr. Tilford of the Center for European Reform said. “They need a two-pronged policy: full-blown quantitative easing by the central bank, and an expansionary fiscal policy by governments to boost demand.” |
| Mr. Tilford said that he expected the European Central Bank to move forward with quantitative easing, but that it would be hard to convince the market that the central bank “will do enough for long enough to restore inflation expectations.” | Mr. Tilford said that he expected the European Central Bank to move forward with quantitative easing, but that it would be hard to convince the market that the central bank “will do enough for long enough to restore inflation expectations.” |
| As for government pump-priming, which if it happened could come from tax cuts or deficit spending, Mr. Tilford said, “there is absolutely no indication at all that we’ll see a change in fiscal policy.” | |
| Nicholas Spiro, managing director of Spiro Sovereign Strategy in London, wrote in a note on Wednesday that the contraction in consumer prices “is a severe blow to the credibility” of the European Central Bank. | |
| Mr. Spiro said expectations of aggressive central bank action had so far helped to calm fears that Greece would choose to abandon the euro. | Mr. Spiro said expectations of aggressive central bank action had so far helped to calm fears that Greece would choose to abandon the euro. |
| “The E.C.B.’s hand has been forced,” Mr. Spiro added. “Anything less than a firm pledge by its president, Mario Draghi, that sovereign quantitative easing is imminent will be taken very badly by markets.” | “The E.C.B.’s hand has been forced,” Mr. Spiro added. “Anything less than a firm pledge by its president, Mario Draghi, that sovereign quantitative easing is imminent will be taken very badly by markets.” |