Eurozone prices climb at fastest rate in 3 years
Print Edition
THE deflation bugbear that the European Central Bank has battled for the past couple of years appears to have been seen off, at least for now.
Consumer prices across the 19 countries that use the euro grew in December at their fastest rate since September 2013, official figures showed yesterday.
A surge in oil prices, triggered by the recent decision by crude-producing countries to cut output, contributed most to the near-doubling in the annual inflation rate to 1.1 percent from November’s 0.6 percent.
Though higher inflation can eat into consumer spending, it can also help push up wages and stimulate economic activity in a region that has largely stagnated.
As such, the figures are likely to provide some relief to policymakers at the ECB who have used a range of stimulus programs to get inflation back toward their target of just below 2 percent, considered most suitable for a healthy economy.
With the inflation rate still short of that target, the central bank is unlikely to give up on stimulus anytime soon.
Though the ECB can argue that its policies, which have included cutting interest rates and injecting billions into the financial system, have shored up the economy, the main contributor to the December spike in inflation was out of its control: energy prices.
Eurostat, the European Union's statistics agency, said energy costs rose 2.5 percent in the year to December from a 1.1 percent drop in November. In December, the price of crude oil rose above US$50 a barrel — from below US$30 a year earlier — after the OPEC oil cartel and other nations agreed to cut output levels.
When energy costs are excluded, inflation remains muted. The core rate, which strips out the volatile items of alcohol, energy, food and tobacco, rose to only 0.9 percent from the previous month’s 0.8 percent. That suggests that high unemployment in many parts of the eurozone following the region’s debt crisis continue to weigh on wage demands and consumption.
“Despite headline inflation returning to an upward trend we expect that the ECB’s preference will be to maintain the policy course ... and ‘look through’ energy-influenced price developments in coming months,” said Cathal Kennedy, European economist at RBC Capital Markets.
In the near-term, higher headline inflation could weigh on economic activity if wages don’t keep up, as people’s income won’t go as far.
However, a steady level of inflation is considered good for an economy as it can drive up wages and promote innovation and investment by firms. It can also reduce debt levels for firms and countries in real terms.
That’s certainly a better prospect than prices falling over a sustained period, a phenomenon known as deflation that has haunted Europe in the past few years.
Lower prices may sound good and have in fact been a boon to European consumers recently as they were due to the slide in oil prices — money saved filling up a car or on home heating could be spent elsewhere.
The problem arises when a fall in prices endures. That can choke the life out of an economy if consumers put off purchases in the hope of future bargains. It can erode profits and make governments’ debts appear greater. Deflation has proven difficult to reverse, as evidenced by the case of Japan over the past couple of decades.
Ben May, lead eurozone economist at Oxford Economics, conceded higher inflation could pressure eurozone economic activity in coming months.
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