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Tue Jan 7, 2014, 05:57 AM

Eurozone inflation rate falls to 0.8%

Last edited Tue Jan 7, 2014, 01:06 PM - Edit history (1)

The eurozone's inflation rate fell to 0.8% in December, official figures have shown, down from 0.9% in November.

The Eurostat data means that the inflation rate has moved further away from the European Central Bank's (ECB) target of just below 2%.

In November, the ECB cut its benchmark interest rate to a record low of 0.25%, reflecting the low inflation outlook.

The ECB will gather for its latest meeting later this week, although no changes to policy are expected.

The data may fuel concerns that the eurozone risks a period of deflation, in which consumers delay purchases in the expectation that prices will fall further...

/... http://www.bbc.co.uk/news/business-25636441

But low inflation alone can cause problems. And with 11 of the euro zone's 18 members recording inflation below 1% in November, the problem is widespread.

The key issue is that it will make the process of adjustment more difficult for countries that need to boost their competitiveness. Arguably, a period of higher inflation in the stronger countries would now help to counterbalance low—but still positive—inflation in the weaker countries, helping to rebalance the euro zone. After all, this would simply be the opposite of the situation in 2000-07, when Germany was undertaking reforms: German inflation averaged 1.5%, euro-zone inflation was 2.2% and the rate in the so-called periphery countries was 3.3%, Citigroup notes. But German inflation as measured by European Union standards is running at just 1.2%.

And low inflation threatens over time, perhaps, to reawaken concerns about debt sustainability in some countries. While there has been encouraging news on real growth in gross domestic product in recent months, the fall in inflation will reduce its ability to erode debt. After all, it is nominal growth, not real growth, that is decisive for debt-to-GDP ratios.

The ECB's problem is that it has already fired a good deal of monetary ammunition. Rates are at 0.25% and options deployed elsewhere such as quantitative easing are operationally tricky for the ECB. The main tactic appears to be to wait it out as growth picks up gradually.

For now, the ECB should keep its powder dry: The latest data don't change the big picture, and there are encouraging signs on growth from business surveys and from markets, where sovereign borrowing costs for southern Europe are continuing to fall. But if inflation slows significantly from here, the ECB will again be forced to enter new monetary policy territory.

/... http://online.wsj.com/news/articles/SB10001424052702304887104579306354114249772

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