March 28, 2024

Low Inflation Worries the Euro Zone

Prices in the 17 European Union member states that were using the euro in 2013 rose in December at an annual rate of only 0.8 percent, Eurostat, the European Union statistical agency, reported on Tuesday in a first estimate that will be subject to revision in the weeks ahead. The December figure, which did not include Latvia since it adopted the euro on Jan. 1, was slightly lower than the 0.9 percent annual inflation rate for November.

The European Central Bank seeks to keep price growth steady at about 2 percent. The situation now, in which the rate of inflation is falling, is known as disinflation. If the situation continues in this direction, Europe could face outright deflation — a debilitating economic condition in which prices actually decline across the board.

As long as hints of deflation remain, the E.C.B. faces a difficult challenge.

Economists do not, for the most part, expect the E.C.B. to take action when its Governing Council meets on Thursday in Frankfurt. But the issue is certain to figure prominently in discussions between the bank’s president, Mario Draghi, and his colleagues.

Most worrisome to economists assessing the data released on Tuesday is the “core” inflation rate, which strips out volatile food and energy prices. It dipped to 0.7 percent — a record low since the advent of the euro currency. The core number for December was equivalent to the broader, overall figure for October that led the E.C.B. to cut its benchmark interest rate to a record low of 0.25 percent, down from 0.5 percent.

Clemente De Lucia, an economist at BNP Paribas, said on Tuesday that the December consumer price data might have been affected by a change in the way Germany calculated its inflation, so another month or two might be needed to be certain of the trend.

“Yet, the level of inflation remains dangerously low,” he wrote in a note. “Survey data show that the recovery is gaining some momentum. Yet its pace will remain rather low and it needs to be sustained by policy maker actions.”

Data for all of the euro zone members is not yet available, but there is significant variation in price trends within the zone. Germany, for example, posted inflation of 1.2 percent in December. But Cyprus, hammered by the collapse of its financial industry, is already experiencing deflation, as prices slipped 2.3 percent in December.

Spain’s consumer prices rose just 0.3 percent, while Italy’s rose only 0.2 percent, as those two countries’ troubled economies teetered near a deflationary cliff.

Deflation would only add to the broader economic malaise in the region, by hurting corporate profits and by leading consumers to delay purchases in anticipation of better deals in the future. It would also weigh heavily on borrowers, making loan repayments more expensive in real terms — a particular danger for Europe’s already fragile financial sector.

In the view of at least one outside observer, Europe’s deflationary pressure may be a symptom of a larger problem, in which austerity measures and imbalances among countries in the region have hampered growth. Jacob J. Lew, the United States Treasury secretary, said on Tuesday at a news conference in Paris that Europe needed to focus more on investment and stimulating demand, suggesting that the Continent’s most powerful economic engine, Germany, should take the lead.

“It’s clear that some countries have more capacity to stimulate growth and demand than others do,” Mr. Lew said, in a clear reference to Germany.

“Short-term demand has to be part of the agenda,” added Mr. Lew, who is on the Continent this week for talks with government leaders and finance officials in Paris, Berlin and Lisbon. “It’s too important to look at a single economic statistic.”

Mr. Draghi has suggested that the bank’s toolbox for addressing falling prices has not been exhausted, and includes the possibility of enacting negative interest rates — in effect, punishing commercial banks for depositing funds at the central bank. The goal of such a move would be to force banks to pump more money into the economy in the form of lending, which could have at least a mild inflationary effect.

This article has been revised to reflect the following correction:

Correction: January 7, 2014

An earlier version of this article erroneously included one euro zone member state among those covered by the December data on inflation. The inflation rate in Latvia, which adopted the euro Jan. 1, was not reflected in the data.

Article source: http://www.nytimes.com/2014/01/08/business/international/another-worryingly-low-inflation-rate-for-the-euro-zone.html?partner=rss&emc=rss

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