ECONOMY

Draghi deflation challenge underlined as prices plunge by record

Mario Draghi’s deflation challenge was underlined on Friday with prices plunging at a pace last seen in the depths of the recession in 2009.

The annual inflation rate fell to minus 0.6 percent, matching the biggest decline in prices in the history of the single currency, according to data published by Eurostat. The drop exceeded economists’ estimates for a 0.5 percent slump. Unemployment fell to 11.4 percent in December, a separate report showed.

Sinking prices combined with stubbornly high unemployment led the European Central Bank president to announce a 1.1 trillion-euro ($ 1.2 trillion) stimulus plan last week that centered on government-bond purchases. Even though the size of the program exceeded economists’ forecasts, it’s still unclear whether it will be enough to return inflation to the Frankfurt- based central bank’s goal of just under 2 percent.

The data “provides strong justification for the ECB’s recent decision to embrace QE,” said Teunis Brosens, an economist at ING Groep NV in Amsterdam. “The key number to watch in the coming months is core inflation. Any further falls may raise concerns that QE has come too late to stave off deflation.”

Core inflation in the euro region slowed to 0.6 percent in January from 0.7 percent in December. That’s the lowest since the euro was introduced in 1999.

The euro rose 0.4 percent against the dollar and traded at $1.1357 at 12:34 p.m. Frankfurt time.

Spain, Germany

In Spain, prices declined 1.5 percent in January from a year earlier. In Germany, they fell 0.5 percent. The last time the euro area recorded a 0.6 percent slide was in the depth of the recession in July 2009.

Euro-area inflation expectations fell below 2 percent in August and have dropped further since. Although policy makers including Draghi say they don’t see signs of postponed spending in anticipation of declining prices, the rate may stay negative for a substantial part of the year.

Professional forecasters surveyed by the ECB before the QE decision on Jan. 22 predicted price growth of 0.3 percent this year and 1.1 percent in 2016. The bond-buying program is seen boosting inflation by 0.4 percentage point and 0.3 percentage point, respectively, according to a euro-area central bank official who has seen the ECB’s internal calculations.

Green Lights

ECB Executive Board member Benoit Coeure said in a Bloomberg Television interview last week that QE could be expanded or extended if the impact on prices isn’t judged enough.

“It will end only once we get a strong sense that inflation is converging toward 2 percent,” he said in an interview with Italian newspaper Corriere della Sera published on Thursday. At the same time, “all of the lights are green” for the economy, he said. “2015 could see significant growth.”

In a sign that growth momentum is picking up, euro-area economic sentiment rose in January for the first time in three months to its highest since July. Manufacturing and services activity expanded at the fastest rate in five months at the beginning of 2015.

Unemployment fell to the lowest level since August 2012, Eurostat said in a separate report. The rate stood at 4.8 percent in Germany, and at 23.7 percent in Spain.

In Greece, persistently high joblessness has contributed to a backlash against austerity and was one of the key factors behind the victory of the Syriza party in elections. Prime Minister Alexis Tsipras’s pledge to renegotiate bailout terms and write down debt has alarmed investors already concerned about the future of the currency bloc and its economy.

“The new Greek government is starting with very strong messages,” said Gilles Moec, chief European economist at Bank of America Merrill Lynch said in an interview with Guy Johnson on Bloomberg Television’s The Pulse. “Thank god they actually moved with QE before we got the results of the Greek elections.”

[Bloomberg]

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