The European Central Bank (ECB) is expected to come under intense pressure to boost the supply of cheap credit to the eurozone after figures showed a much-feared period of deflation started in December, triggered by falling oil prices.
A flash estimate of inflation found that a dramatic fall in fuel costs following the halving of oil prices dragged prices down by 0.2%.
Separate data for unemployment in the eurozone turned the screw on the ECB board after the figure rose by 34,000 to maintain the unemployment rate at 11.5%.
One analyst described the figures as “dire news” that will put “strong pressure on the ECB to pull the quantitative easing (QE) trigger” at its next meeting later this month.
The ECB has split over the need for QE since the Bank of England, Bank of Japan and US Federal Reserve began buying bonds following the 2008 financial crisis.
Some officials have stressed that the dip in inflation could be a temporary feature and results from a short-term fall in oil prices, which will benefit economic growth over the next year without the need for QE.
Eurostat said that core inflation, which excludes the volatile energy and unprocessed food prices, was stable at 0.7% year-on-year in December – the same level as in November and October. The price of services rose by 1.2% on the previous year.
However, unemployment has remained stubbornly high. In Italy it rose to 13.4% and in Portugal 13.9%. In Spain and Greece around a quarter of the workforce remain unemployed.
The ECB has hinted it is poised to pump funds into eurozone financial system, but with little clue as to how the plan will take effect. ECB President Mario Draghi is understood to be lobbying for a wide-ranging bond-buying programme that covers government and corporate bonds. He has faced resistance from German officials concerned that the purchase of government bonds will ease the burden of austerity on southern European countries.
Howard Archer, chief European economist at IHS Global Insight, said: “While the ECB would normally look through any drops in the headline inflation rate resulting from sharply falling oil prices, the bank will be seriously concerned that the move into deflation in December will lead to a further significant weakening in inflation expectations that then feeds through to result in renewed drops in already worryingly low-core inflation.”
Danae Kyriakopoulou, an economist at the consultants CEBR, said QE would be welcomed by most indebted eurozone nations, “but it would be insufficient to kick-start the recovery”.
He said: “A softer take on austerity and the setting of both fiscal and monetary policies in expansionary mode are imperative to avoid another crisis.”
