With oil prices plunging inflation in the eurozone has fallen by 0.3 percent in the year to December, according to official figures released on Friday.
The European Union’s statistics agency, Eurostat, revealed that there was a decline in consumer price inflation rate, largely because of the 2.5 percent drop in energy costs.
If you exclude volatile energy, food, alcohol and tobacco prices, then inflation remained steady at 0.7 percent.
The fall in November moves inflation further away from the European Central Bank’s (ECB’s) target of just below 2 percent. This is likely going to add pressure on policymakers to launch a bigger monetary stimulus program.
The ECB asses a lot of factors when evaluating the overall economy and inflation, particularly the sharp decline in oil prices over the past several weeks.
Energy prices have dipped due to an oversupply of oil. In addition, OPEC decided not to cut production output on Thursday, which won’t help stabilize oil prices. Crude oil dropped to a four year low following OPEC’s decision.
The eurozone is mainly an importer of oil and gas, therefore the fall in prices will reduce costs and allow businesses to divert their investments.
But the problem with a drop in oil prices in the Eurozone is that inflation could turn negative in the months ahead.
James Ashley, chief European economist at RBC Capital Markets, said:
“The risks around our already-anaemic inflation profile lie very firmly to the downside,”
As a result, the ECB is going to be under pressure to ensure that low inflation rates doesn’t allow the bloc to enter deflation, which could have a significantly negative impact on the economy – as seen in Japan.
The ECB recently slashed rates to 0.05 percent.
But, will the ECB back a larger scale stimulus program?
Not that many economists believe the ECM will approve a stimulus program when it meets at next week’s monthly policy meeting. Although it could prove to be the only way for the bloc to come out of it’s period of malaise.
According to Eurostat, unemployment remained steady in October at 11.5 percent, despite the number of jobless people rising by 60,000 to 18.4 million.
There appears to be huge differences between individual nations in the Eurozone regarding unemployment. Germany, on the one hand, is at near full employment, while Spain and Greece continue to struggle with mass unemployment. In Italy the unemployment rate increased from 12.9 percent up to 13.2 percent.