LONDON – A fall in energy costs as a result of dramatic declines in oil markets has pushed inflation across the 18-country eurozone down to 0.3 per cent in the year to November, official figures showed Friday.
Preliminary numbers from the European Union’s statistics agency, Eurostat, showed the dip in the consumer price inflation rate from the previous month’s 0.4 per cent was largely due to a 2.5 per cent decline in energy costs. Excluding volatile energy, food, alcohol and tobacco prices — a gauge policymakers at the European Central Banks monitor closely — inflation was steady at 0.7 per cent.
November’s fall in the headline rate takes inflation further away from the European Central Bank’s target of just below 2 per cent. It’s likely to maintain pressure on policymakers to launch in the coming months a bigger monetary stimulus program similar to the one the Federal Reserve recently brought to an end.
In gauging the strength of the economy and inflation, the ECB has a number of issues to assess, not least the sharp fall in oil markets in recent months. Energy prices have taken a battering due to a recovery in production from Iraq and Libya, the increase in shale gas output in the U.S., as well as a slowdown in many leading economies, notably China and Europe. On Thursday, crude oil prices fell to fresh four year lows after OPEC decided to keep oil production levels unchanged.
For the eurozone, which is primarily an importer of oil and gas, the fall in wholesale prices can be a boon as drivers reap the benefits at the pump and businesses can divert resources to investment. However, lower wholesale prices can be a problem in an economy that has low inflation. Economists warn that eurozone inflation may turn negative in the months ahead because of the fall in energy costs.
“The risks around our already-anaemic inflation profile lie very firmly to the downside,” said James Ashley, chief European economist at RBC Capital Markets.
As a result, the ECB is under pressure to do more to bolster the eurozone economy and to make sure that the current low inflation rates don’t turn into outright deflation — a sustained period of falling prices can wane on an economy as Japan’s two-decade stagnation has proven.
The ECB has already cut its main interest rate to a record low of 0.05 per cent and has programs meant to boost bank lending. The question now is whether it will back a larger stimulus that involves large-scale buying of government bonds — so-called quantitative easing, or QE.
Few economists think the ECB will back such a stimulus program at next week’s monthly policy meeting. Earlier this week, the ECB’s vice-president, Vitor Constancio, indicated that it’s something the 24-member governing council will look at in the first quarter of next year.
“Quantitative easing is the only remaining option for the eurozone to break free from this permanent state of malaise,” said Dennis de Jong, managing director at UFX.com.
Separately, Eurostat also said unemployment was steady in October for the fifth straight month at 11.5 per cent even though the number of people out of work rose by 60,000 to 18.4 million.
The figures once again show huge divergences across the eurozone, with countries like Germany operating at near full employment. Others like Spain and Greece continue to suffer under the weight of mass unemployment, despite improvements over recent months. One source of growing concern is Italy, where the unemployment rate rose to 13.2 per cent from 12.9 per cent.
Jonathan Loynes, chief European economist at Capital Economics, said the economic backdrop provides “yet another nudge” to the ECB to do more.
“While the latest hints suggest that it may wait until January before taking further policy action, it seems clear that some form of QE program is both needed and likely,” he said.