Surprise drop in euro zone inflation shows deflation risk

Tue Jan 7, 2014 6:08am EST
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By Martin Santa

BRUSSELS (Reuters) - Euro zone inflation fell in December after a small increase 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 percent year-on-year in the last month of 2013, compared with 0.9 percent in November, data from the EU's statistics office Eurostat showed on Tuesday.

December's reading takes inflation back to near a four-year-low of 0.7 percent in October.

"Today's 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 euro zone economist, referring to the bloc's weaker members.

An inflation rate that is well below the ECB's target of close-to-but-below 2 percent carries risks in the longer term because it can deflate wages and demand, depressing the economy.

Reacting to the data, the euro rose to $1.3646 from $1.3618 on speculation the ECB could consider more steps to support the economy.

The October drop in inflation was the first fall below 1 percent since February 2010 and prompted the European Central Bank to cut its key interest rate to a new record low of 0.25 percent in November.

Still, the euro zone is far from the deflation that Japan suffered from the early 1990s.   Continued...

A customer keeps his purchases in a bag at a wine shop in Alella, near Barcelona October 30, 2013. REUTERS/Albert Gea