Surprise drop in euro zone inflation shows deflation risk

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

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.


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