2 min read

Down, down, down. Eurozone prices on the plunge

Down, down, down. Eurozone prices on the plunge

Some say you can’t call it “deflation” until it’s become a chronic problem. But whatever you call it: deflation, disinflation, negative inflation, what we’ve learnt today is that prices across the eurozone are now falling on a year-on-year basis.

The annual rate at which the single currency’s main index of prices is dropped from 0.3% in November to -0.1% in December.

As you can see, it also dropped below zero at the height of the crisis in mid-2009. That’s worrying enough. What’s also a concern is that this time around the fall might be more chronic – that it’s down to weak growth and lack of demand throughout the single currency area. And, most worryingly, that this weakness is a problem even in those countries which stood up pretty well throughout the crisis – places like Germany and France.

On the flip side, a good part of the explanation for the fall is that energy prices (oil and all that) have fallen so sharply.

eurozoneinflation

Then again, core inflation (excluding energy, food and other volatile items) is also down at 0.8%, though it is up from 0.7% the previous month. So while this is certainly partly about oil – that isn’t the entire story.

While falling prices might sound attractive in some senses, they can be pretty damaging if they continue. For one thing, they are disastrous for indebted countries (of which the eurozone has a fair few) as they reduce their capacity to pay off debts. They are difficult for a central bank to confront, particularly if their interest rates are already at zero (or, in the case of the European Central Bank, below zero). They can also discourage families and businesses from spending, since why bother making that big purchase today if it’ll be cheaper tomorrow.

The ECB is likely to respond with either full-blown quantitative easing or details of an analogous plan to try to take falling prices on. That might come as soon as this month.

And the deeper worry is that if prices continue to fall, that is pretty disastrous

Here is the full release from Eurostat (pdf).

PS we also had unemployment data released by Eurostat. The overall rate of 11.5% in November disguises some big divergences. Check out the interactive map here for more: 

Comments

Sign in or become a Ed Conway member to join the conversation.
Just enter your email below to get a log in link.