Eurozone heads for ‘protracted’ deflation

EUROZONE prices suffered their joint biggest drop in the single currency’s history in January, as signs emerged that the impact of falling energy prices was feeding through to the wider price chain.

Prices in the eurozone were 0,6 percent lower than a year earlier, following deflation of 0.2 percent in December, according to a preliminary estimate by Eurostat.

This is the joint biggest annual drop in prices since July 2009, and worse than economists’ expectations for a 0,5 percent fall.

The decline was led by a 8,9 percent annual fall in energy costs. However, there were also signs that the recent tumble in the oil price was spilling over to the wider price chain.

Core inflation – which strips out volatile elements such as food and energy costs – rose by 0,6 percent in the year to January, from an annual increase of 0,7 percent in December.

Economists warned that the eurozone could be headed towards a “protracted” period of deflation.

“The drop in core inflation almost certainly reflects the continued weakness of demand in the eurozone economy, and the associated vast amount of spare capacity,” said Jonathan Loynes, an economist at Capital Economics.

While falling oil prices have put more money in consumers’ pockets and are expected to boost growth in the eurozone, Mr Loynes said there was a risk that deflation could persist, even as oil prices recovered.

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