January 16, 2014 / 10:10 AM / 6 years ago

Euro zone inflation slows in December, IMF flags deflation risk

BRUSSELS (Reuters) - Euro zone inflation slowed in December, the European Union’s statistics office confirmed on Thursday, in what the European Central Bank attributed last week to a one-off change in the method of calculating price growth in Germany.

An illustration picture shows Euro coins, photographed in Warngau April 3, 2013. REUTERS/Michael Dalder

Price pressures are weak, enough, however, to prompt concern at the International Monetary Fund about deflation.

Consumer prices in 17 countries sharing the euro last year rose 0.3 percent on the month, putting the annual inflation rate at 0.8 percent, down from 0.9 percent in November, but a tad above 0.7 percent in October.

The ECB, which wants to keep inflation below-but-close-to 2 percent over the medium term, expects a prolonged period of low inflation but sees no immediate risk of deflation - or actual falling prices.

“We were all aware that the decline in the inflation rate in December ...(It) was expected, and it was caused by a technical adjustment in the statistics of the services inflation in Germany,” ECB President Mario Draghi said last week.

“(This) basically produced a much flatter seasonal adjustment and it meant that the December data came out lower.... But fortunately this was a one-off event, so that the January data will not be distorted by this,” he said.

The International Monetary Fund, however, said on Wednesday it expected global growth to pick up this year but flagged deflation as a rising risk.

“If inflation is the genie, then deflation is the ogre that must be fought decisively,” IMF chief Christine Lagarde told the National Press Club in Washington.

Eurogroup President Jeroen Dijsselbloem said earlier on Thursday consumer prices were unlikely to slow further and the current low level is not a major threat to economic recovery.

BUMPING ALONG THE BOTTOM

The October inflation level was a nearly four-year low and pushed the ECB towards a cut in its key lending key rate to a record low of 0.25 percent in November.

The monthly consumer price increase in December was led by a 0.6 percent rise both in prices of services and the highly volatile energy costs.

Prices of food, alcohol and tobacco were up by 0.5 percent while costs of non-energy industrial goods fell 0.3 percent when compared with November.

Consumer prices in Germany, Europe’s largest economy, rose 0.5 percent on the month in December, but the annual inflation dropped to 1.2 percent from 1.6 percent in November.

The annual inflation rate in Spain stood 0.3 percent for the second month in a row in December after being flat in October.

Annual inflation in Portugal rose for the third consecutive month, but was still standing at just 0.2 percent in December.

The fall in inflation rates is related to an overall economic adjustment and restoring of competitiveness of Europe’s southern periphery countries, where growth collapsed during the crisis and triggered a massive austerity push.

“While eurozone growth is expected to improve modestly during 2014, activity will likely generally remain too limited to generate any significant inflationary pressures,” said Howard Archer, chief European economist at IHS.

“Furthermore, a relatively strong euro is also limiting inflation,” he added.

Reporting by Martin Santa

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