Eurozone deflation fears grow
Azad Zangana, European economist at Schroders commented on the latest eurozone inflation figures: “The flash estimate for eurozone inflation in January showed a fall in the annual rate of inflation to 0.7%, compared to 0.8% at the end of 2013. The fall in annual inflation surprised economists, which had expected a rise to 0.9%.
“Within the details, core inflation (excluding energy, food, alcohol & tobacco) increased from 0.7% to 0.8%. Given that core inflation is now higher than headline inflation highlights the negative impact from the more volatile categories of goods and services. January is usually a month impacted by changes to regulated prices, especially in home energy markets. The lower headline inflation over the past year will have now fed through into lower rises in these regulated prices, compounding the weak inflation seen of late.
“The low levels of inflation are leading many investors to question whether the eurozone is slowly slipping into a Japanese style deflationary downward spiral. At this stage, we do not believe the eurozone has entered an outright deflationary trend, however, the risks are rising. The low inflation figures could prompt the European Central Bank to add more stimulus in the near future, however, the ECB has largely exhausted the tools at its disposal, or at least those tools that Germany is willing to tolerate.”
