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Eurozone Consumer Prices Fall for First Time Since 2009, Adding to Deflation Fears Prices Fall and Worry Escalates in the Eurozone
(about 7 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. PARIS — The European Central Bank has another reason to unleash the full force of its stimulus powers.
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. On Wednesday, an official report showed that consumer prices in the eurozone fell 0.2 percent in December from a year earlier.
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. A single month of falling prices does not meet the classical definition of deflation — a widespread, protracted and self-sustaining decline. The condition may be even more debilitating than runaway inflation because it is difficult to reverse.
“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. And the continued global collapse of crude oil prices contributed significantly to the decline, blurring somewhat the implications of the inflation report for the 19-country euro currency union.
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. But because Wednesday’s report was the first to show prices actually turning negative in the eurozone for the first time since the dark days of the global financial crisis in 2009, it underscored fears that European policy makers might have been underestimating the threat of the sort of long-term stagnation that afflicted Japan two decades ago.
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. “We’re not yet in a self-sustaining spiral,” said Gilles Moec, chief European economist at Bank of America in London. “But we’re close.”
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. Wednesday’s data can only increase pressure on Mario Draghi, the president of the European Central Bank, and his colleagues to move more aggressively to try to prevent a downward price spiral that could undermine the economy for years to come.
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. But the question raised by many economists is whether the European Central Bank has waited too long to act, and whether its arsenal is powerful enough to address the eurozone’s fundamental problem — a dearth of demand from businesses and consumers for goods and services. Even Mr. Draghi has said that the central bank cannot shoulder alone the burden of restarting growth.
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.” “The eurozone is suffering from a profound malaise,” said Simon Tilford, deputy director of the Center for European Reform, a think tank 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 currency bloc of 19 nations.
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. A separate official report on Wednesday showed that the eurozone jobless rate remained at 11.5 percent in November, around the level at which it has rested for the last year.
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. Economists fear that unemployment could rise further 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 their lenders.
European stocks rose, though, with the benchmark Eurostoxx 50-stock 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. The labor market provides one illustration of the divergence in the eurozone. In Germany, which has the bloc’s biggest economy, unemployment fell to 6.4 percent in December from 6.5 percent in November. But in the second- and third-largest of the eurozone economies, France and Italy, the jobless rates climbed, with Italian unemployment reaching a new high of 13.4 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. And in Greece and Spain, about one-quarter of the population remains without work, a level consistent with economic depression.
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. Analysts said on Wednesday that it was now a certainty that the European Central Bank would announce aggressive new measures when it meets in Frankfurt on Jan. 22. They expect the central bank to say it is ready to begin effectively printing money that it would use to buy eurozone government bonds, even if it does not put the measures into practice for several months.
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. The central bank has an official goal of trying to keep inflation at just below 2 percent — which it considers an optimal level for a healthy economy. But the bank has not met that target in two years.
Japan’s experience in the 1990s showed that traditional monetary instruments are largely ineffective with nominal interest rates at zero. Japan’s experience in the ’90s showed that traditional monetary policy instruments are largely ineffective with nominal interest rates at zero, as they essentially are now in the eurozone.
Well before eurozone consumer prices tipped below zero, the region’s worrisomely low inflation had been raising alarms among economists. Another way to address the problem might be for eurozone countries to drop their insistence on balancing budgets and to instead use tax cuts and public spending to create demand.
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. So far, though, European officials appear to be holding their course.
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. “Yes, the eurozone is going through a period of low inflation,” Jeroen Dijsselbloem, cq the Dutch finance minister and president of the Eurogroup of eurozone finance officials, said in a statement in response to a New York Times query. “But one of the most important reasons for the current low inflation rate is the falling oil price. Core inflation — excluding oil prices — has recently slightly increased.”
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.” The “core” inflation rate, which excludes energy and food prices, ticked up to 0.8 percent in December from 0.7 percent the month before, according to Wednesday’s data.
“We are not there yet,” Mr. Draghi said in an interview with the German newspaper Handelsblatt. “But we need to tackle this risk.” The German government of Chancellor Angela Merkel, which has taken a tough line against coordinated economic stimulus, indicated that the latest data had not altered its thinking. A spokesman for the Finance Ministry said in Berlin on Wednesday that Germany would not revise its analysis that there was no risk of deflation in the country. That statement came despite a report on Monday showing that German consumer prices rose 0.1 percent last month.
Jörg Krämer, chief economist at Commerzbank in Frankfurt, on Wednesday defended the German view, saying that the danger was being overstated in light of the debt overload that was behind the global and European financial crisis that developed in 2008. “It’s inevitable after the bursting of a debt bubble that inflation is low, as consumers and business repay their debts and spend only hesitantly,” he said.
Some of the weakness in prices reflects lower labor costs in the weaker “peripheral” eurozone members, he said, something that can make their economies more competitive. “We do not have harmful deflation,” he said.
There is no question, though, that the eurozone is ailing. The bloc’s economy expanded 0.6 percent in the third quarter of 2014 on an annualized basis. That is far short of the United States economy’s 5.0 percent growth, and recent data suggest that the eurozone pace has been slowing.
That stark difference is one reason the value of the euro currency has been plunging compared to the dollar in recent weeks. It fell again on Wednesday after the inflation report, declining more than 0.5 percent to $1.1816 cq per reuters europe markets wrap — its lowest level in nine years. As was the case the last time the euro was this low, fund managers are moving investments to the United States in expectations of a better return on their money.
Consumer prices in the eurozone had not contracted on an annual basis since October 2009, when the slack global economy made the bottom fall out of the market for oil and other commodities. December’s negative rate was down from the 0.3 percent increase in November, which itself was worrisomely low.
Well before eurozone consumer prices tipped below zero, the region’s low inflation rate had been raising alarms.
Economists with the International Monetary Fund 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.”
Mr. Draghi, the central bank president, said last week in an interview with the German newspaper Handelsblatt that the risk of deflation “cannot be ruled out completely, but it is limited.”
“We are not there yet,” Mr. Draghi said. “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 eurozone countries, and who would pay if a government defaulted on bonds held by the central bank. That uncertainty is a main reason that Germany, as the richest eurozone nation, does not want to put its taxpayers at risk of having to bail out the bloc’s weaker neighbors.
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. Still, investors have been snapping up government bonds of eurozone countries amid expectations that a European Central Bank purchasing program would make them more valuable. Yields on German, French and Belgian bonds have all hit record lows this week.
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. Ireland on Wednesday was able to issue seven-year bonds at a yield of 0.867 percent, an astonishingly low rate for a country that was bailed out by the I.M.F. and the European Union in 2010.
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.”
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.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. “The E.C.B.’s hand has been forced,” he said. “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.”