Eurozone inflation fall adds to ECB pressure

Eurozone inflation fell further during January, according to flash estimates by the EU’s statistical office.

Figures from Eurostat reveal that inflation across the eurozone dropped down to 0.7 per cent over the course of January, compared to 0.8 per cent recorded for the final month of 2013.

Concerns that the eurozone could fall into deflationary territory prompted the European Central Bank to cut interest rates to a record low in November after inflation dropped to a 47-month low of 0.7 per cent in October 2013.

However the ECB has continually reassured that the region is not at risk of slipping into a deflationary cycle as experienced in the Japanese economy.

Eurostat attributes the fall in inflation at the start of 2014 to a sharp drop in energy prices.

IHS Global Insight chief UK and European economist Howard Archer says: “The renewed dip in eurozone consumer price inflation to just 0.7 per cent in January puts significant pressure on the ECB to take further stimulative action at its February policy meeting next Thursday.

“However, we believe it is more likely than not that the ECB will hold fire at its February policy meeting, given that there is evidence that eurozone economic activity is currently picking up gradually.

“Nevertheless, we suspect that with eurozone inflation set to remain very low for a prolonged period, bank lending to businesses continuing to fall markedly and the eurozone’s recovery likely to remain gradual, the ECB is more likely than not to eventually take further action.”

Schroders European economist Azad Zangana adds: “The low levels of inflation are leading many investors to question whether the eurozone is slowly slipping into a Japanese-style deflationary downward spiral.

“At this stage, we do not believe the eurozone has entered an outright deflationary trend, however, the risks are rising. The low inflation figures could prompt the European Central Bank to add more stimulus in the near future, however, the ECB has largely exhausted the tools at its disposal, or at least those tools that Germany is willing to tolerate.”