Rates from August 2014 to January 2015
Weighed down by another notable decline in energy prices, inflation in the Eurozone fell in January, indicating that the euro area may be slipping into a downward spiral of deflation.
Inflation data from Eurostat.com—the official statistics office of the European Union—released on Feb. 26 showed that the Harmonized Index of Consumer Prices (HICP) fell 0.6 percent in the 19-country euro area bloc from -0.2 percent the month before, which marks the third consecutive month of decline.
“It puts further pressure on the European central bank to move to some form of quantitative easing,” said John Devereux, who is an Economics Professor at Queens College in New York.
The number has dropped significantly since December and hasn’t declined this much since July 2009 (-0.7 percent). It’s down 1.4 percent from a year ago, which isn’t a good sign for the European Central Bank in it’s fight to pull the inflation rate up to its target level of around 2 percent.
“It is one more piece of evidence that the Eurozone needs to worry seriously about deflation,” said Dr. Richard Cooper, who is Maurits C. Boas Professor of International Economics at Harvard University.
Core inflation is at 0.6 percent after Tuesday’s release, down from 0.7 percent in December.
Unlike HICP, core inflation doesn’t take into account the price levels of energy, food, alcohol and tobacco.
“The central bank can pretty much control inflation and deflation,” Devereux said. “They will come close to reaching their target either this quarter or next.”
Free falling energy prices have played a role in the consistent decline of the HICP inflation, but the upside may be that the price of oil has risen to $50.52 a barrel from just over $48 on Feb. 26.
Energy prices rose from September 2014 (-2.3 percent) to October 2014 (-2.0) but has since plummeted rapidly, dropping another 0.6 percent in November and then falling to -6.3 percent in December and -9.3 percent in January, according to Eurostat.
The stimulus package implemented by the European Central Bank in January will pump $69 million in assets per month in to the economy until September 2016.
In the meantime, the consistent drop in inflation may be a worrisome sign for the euro area as consumers will more than likely delay major purchases, holding out and expecting prices to fall even further.
In turn, businesses and sales might suffer, which would possibly lead to an increase in the already stunning unemployment rate (11.4 percent in December) and a decline in business investment.
“Europe faces no problems with deflation or a big recession but it is suffering from a slow recovery,” Devereux said.