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Euro-Area Prices Drop More Than Forecast, Highlighting Growing Risk of Deflation

The inflation rate in the euro area fell below zero for the first time in more than five years, bolstering the case for more European Central Bank stimulus.

Prices dropped 0.2 percent in December, the European Union’s statistics office in Luxembourg said today. That’s the lowest rate since September 2009. Economists in a Bloomberg survey predicted a decline of 0.1 percent. Unemployment held at 11.5 percent in November, Eurostat said in a separate report.

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ECB officials are working on a plan to buy government bonds as they strive to prevent a deflationary spiral of falling prices and households postponing spending, a risk President Mario Draghi has said can’t be “entirely excluded.” They may use a gathering today to weigh options for a quantitative-easing program that may be announced at their Jan. 22 policy meeting.

“According to the ECB’s own logic, with sub-zero inflation, no sign of a material pickup on the horizon, and inflation expectations de-anchoring, there is a compelling case for further monetary easing,” said Teunis Brosens, an economist at ING Groep NV in Amsterdam. “The question no longer seems ‘if’ the ECB is going to announce QE, but ‘how’ it will be tailored.”

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Joblessness in Italy rose to a record 13.4 percent in November, separate data showed. German unemployment, calculated under a national measure, fell to 6.5 percent in December, the lowest in more than two decades.

Oil-Price Drop

The euro was little changed after the release and traded at $ 1.1863 at 11:23 a.m. in Frankfurt, down 0.2 percent today. The Stoxx Europe 600 Index was up 0.7 percent.

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A sluggish economy and slumping oil prices are damping inflation across the euro region. Consumer prices are falling on an annual basis in Spain and Greece (GKCPIUHY), while data yesterday showed inflation in Germany at 0.1 percent, its weakest since 2009.

Crude oil prices have fallen about 50 percent in the past year amid a supply glut. Core euro-zone inflation, which strips out volatile items such as energy, food, tobacco and alcohol, increased to 0.8 percent year-on-year in December.

ECB officials have taken different approaches in analyzing the impact of plunging oil prices on the economy. While Draghi has warned of a dis-anchoring of inflation expectations and signaled support for QE, Bundesbank President Jens Weidmann favors not acting at this time, arguing that the drop could be a “mini-stimulus package.”

QE Proposals

ECB Chief Economist Peter Praet told Germany’s Boersen-Zeitung last month that in an environment in which inflation expectations are “extremely fragile,” officials cannot “simply look through” the slide in energy costs. Praet makes a recommendation at the start of each monetary-policy meeting.

Central bank staff have worked on QE proposals in the past two months, and Dutch newspaper Het Financieele Dagblad reported yesterday that governors may be offered three different options to choose from at their Jan. 22 meeting.

Since June, the ECB has cut interest rates twice, offered cheap long-term loans to banks to jumpstart lending and started a purchase program for asset-backed securities — a decision Weidmann and German Executive Board member Sabine Lautenschlaeger opposed.

“If you look at past experience we’ve taken major monetary-policy decisions in a situation where there was no unanimity,” Draghi said after the ECB’s Dec. 4 meeting. “So this is what we have to keep in mind.”

To contact the reporter on this story: Stefan Riecher in Frankfurt at [email protected]

To contact the editors responsible for this story: Fergal O’Brien at [email protected] Jana Randow, Paul Gordon

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