UPDATE 1-Euro zone inflation slows in December, IMF flags deflation risk

Thu Jan 16, 2014 7:01am EST

Related Topics

* Inflation slows to 0.8 percent y/y in December
    * ECB says one-off adjustment in Germany behind the move
    * IMF concerned about deflation risk
    * Inflation to stay low for a prolonged period of time


    By Martin Santa
    BRUSSELS, Jan 16 (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.
    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.
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