Frankfurt, Germany.
Consumer prices recorded an annual decline in Europe for the first time since the height of the financial crisis more than five years ago, opening a new chapter in the struggle of the continent to emerge from a prolonged economic prostration.
The news intensifies the pressure on the European Central Bank to do everything in their power to raise inflation to its target of 2 % per annum and increases the likelihood that the meeting scheduled for January 22 the agency approve the purchase of large amounts of sovereign debt.
The fall of 0.2% in consumer prices accumulated between December 2013 and December 2014 was primarily attributable to lower energy, suggesting that inflation may continue to drop in the coming months. That awakens the specter of deflation, a sustained drop in prices that may discourage consumption and investment, as well as hindering the payment of debt.
The price of oil continued its collapse on Wednesday when the Brent oil, the main reference of the global market, briefly fell below $ 50 a barrel for the first time since 2009. Prices have lost more than 50% in recent months because of overproduction and weak demand .
However, the decline in crude oil prices along with the weakening of the euro in currency markets could provide a modest boost to the ailing eurozone.
Consumers and businesses Europe, which rely heavily on energy imports and exports of goods, are among the main beneficiaries of lower oil prices and rising dollar.
“There are some benefits” from the fall in prices said Jonathan Loynes, economist at consultancy Capital Economics. However, the negative aspects like the cushioning effect on wages and higher costs of debt “have the potential to overcome the positives,” he said.
The annual decline of 0.2% of consumer prices released Wednesday by the statistical agency of the European Union exceeded economists’ forecasts and was the first decline since October 2009.
Inflation has remained below 0.5 % since July 2014, which threatens the credibility of the ECB’s efforts to achieve price stability. By excluding food, energy and other volatile prices, core inflation rose 0.8% in December from the previous month.
The euro fell after the news and reached a nine-year high against the dollar. This is expected to ultimately, raise inflation due to higher prices of imports.
The European Commission downplayed the severity of the crash and stressed that the eurozone faces class deflation that threatens corporate profits, wages and spending.
“We would like to emphasize the difference between deflation and temporarily negative inflation figures,” said company spokeswoman, AnnikaBreidhardt, adding the executive arm of the European Union anticipates that the “low inflation will continue in the short term then rebound once the economy gains strength gradually and increase wages.”
However, the currency bloc have problems to implement the policies needed to produce one, capable of generating jobs and can raise prices more robust recovery. Much of the region is beset by high unemployment, unfavorable environment for investment and geopolitical uncertainty.
In the United States and Britain, however, inflation is closer to the 2% target that central banks consider optimal.
“The current level of oil prices and the appreciation of the dollar are generally positive developments for the European economy,” says Hans Lampert, CFO of the German manufacturer Claas KGaA mbH tractor. However, “the political uncertainty in Russia and Ukraine, in addition to stagnation in countries like France, have clouded the outlook.”
The economic impact of lower energy varies by country. Spain and Germany are the biggest beneficiaries, according to BNP Paribas economist Luigi Speranza, who estimates a decline of US $ 10 per barrel adds 0.6% and 0.5% of its GDP, respectively Domestic Product. If firms and households expect the decline in inflation will be temporary, the effect is positive, particularly in the case of companies that import a lot of oil and other commodities.
“Deflation is the law of the automotive business, “says Michel Favre, Chief Financial Officer of the French auto parts maker Faurecia SA, which has reduced prices by up to 1.5% per year to remain competitive. He expects lower prices for plastics and metals which help keep costs in check and that the decline in fuel prices stimulate demand.
Paolo de Cesare, chief executive of the chain French retailer Printemps, foresees a rise in sales in 2015, thanks to the devaluation of the euro. The executive estimated that purchases of tourists offset lower demand for French consumers.
It is expected that the ECB’s response to falling prices include large-scale purchases of sovereign bonds, partly financed with new reserves created for increase the circulation of money in the economy. The policy, known as quantitative easing, has been used by the central banks of the US, Britain and Japan.
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