Surprise drop in Eurozone price growth reveals risk of deflation

City A.M. Reporter
EUROZONE inflation fell in December after a small rise the previous month, increasing the European Central Bank’s challenge of avoiding deflation as well as supporting the bloc’s recovery.

Consumer price inflation in the 17 countries then sharing the euro stood at 0.8 per cent year-on-year in the last month of 2013, compared with 0.9 per cent in November, data from the EU's statistics office Eurostat showed yesterday.

December’s reading takes inflation back to near a four-year-low of 0.7 per cent in October.

“These figures show that it’s too early for the ECB to become complacent about deflation risks, especially in peripheral countries,” said Peter Vanden Houte, ING’s chief Eurozone economist, referring to the bloc’s weaker members. An inflation rate that is well below the ECB’s target of close-to-but-below two per cent may carry risks in the longer term if it deflates wages and demand, depressing the economy.