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Deflation Hits Eurozone

Inflation in the eurozone has turned negative, official figures have shown, with prices in December 0.2% lower than the same month a year earlier.

The tip into deflation adds pressure on the European Central Bank (ECB) to take further action to stimulate the bloc’s economy.

The bank’s inflation target is below but close to 2%.

The fall was driven mainly by lower energy costs due to the plunging price of oil.

Energy prices in December were 6.3% lower than a year earlier. If energy prices are excluded, December’s inflation rate for the eurozone was 0.6%, the same as in November.

Prices for food, alcohol and tobacco were estimated to be unchanged from a year earlier, after rising 0.5% in November.

Prices for services, which had held steady in November, are estimated to have risen 1.2% compared with December 2013.

It is the first time the eurozone has experienced deflation since the depths of the financial crisis in 2009.

Policy Failure

The estimate from Eurostat, the statistical office of the European Union, will be updated later in the month.

James Ashley, chief European economist at Capital Economics, said Wednesday’s data was a footnote to the wider economic picture.

Arguments over whether inflation was just above or below 0%, and whether the tumbling oil was to blame, were “specious,” he said.

“The far more important question is why inflation is anywhere near 0% in the first place: in our view, the inconvenient truth for policymakers is that, in large part, that is a reflection of the failure of policy, both fiscal and monetary.”

Howard Archer, chief European economist at IHS Global Insight called the inflation data “dire news for the ECB”.

Debt Worries

The central bank is increasingly expected to launch a new round of economic stimulus measures, or quantitative easing (QE), and the latest numbers will cement expectations. However, Germany reportedly opposes more QE.

The situation in Greece also complicates the issue. Deflation increases the debt burden, and Greece’s indebtedness to its international bailout creditors is a key issue in the current general election campaign.

Greece’s left-wing anti-austerity Syriza party, leading the election polls, wants to re-negotiate the terms of the bailout, sparking fresh worries about the stability of the eurozone.

On Wednesday, Greece’s long-term borrowing rate rose above 10%. Yields on the 10-year bonds were trading at 10.07%, up from 9.746% on Tuesday.

The main stock market in Athens was also trading down more than 2%.

Separately, Eurostat reported that the unemployment rate in the eurozone remained at 11.5% in November, unchanged from October, but down from 11.9% in November 2013.

Among the euro-bloc states, the lowest unemployment rates in November were in Austria (4.9%) and Germany (5.0%), and the highest in Greece (25.7% in September 2014) and Spain (23.9%).

By Andrew Walker, BBC World Service Economics Correspondent

So, the much-heralded slide into deflation has finally happened.

The falling oil price is the immediate cause and there is, up to a point, a positive aspect to that for the eurozone. It reduces costs for the majority of businesses and leaves consumers with more to spend on other items.

But there can be what the European Central Bank President Mario Draghi called second round effects. If this deflation influences expectations and is reflected in future decisions about prices and pay, it could become entrenched.

There are several reasons why persistent deflation can be damaging, but one big issue for the eurozone is the effect on the many people and governments with debt problems.

If incomes and tax revenues fall those, debts can be even harder to keep under control. That is why some – such as the consultants Capital Economics – have warned there’s now a danger of re-igniting the region’s debt crisis.