Eurozone prices fall fuelling deflation fears

The fall in eurozone consumer prices, attributed to plunging oil prices, is the first sign of deflation hitting the 19 nation currency zone (AFP Photo/Patrik Stollarz)

Brussels (AFP) - The eurozone slipped into deflationary territory in December for the first time since the height of the financial crisis in 2009, EU figures showed Wednesday, challenging the ECB to take action to avert a new economic crisis in Europe.

Consumer prices in the single currency area fell 0.2 percent last month, dragged down by plummeting oil prices and signalling big problems ahead with renewed crisis in debt-plagued Greece also on the horizon.

World stocks nosedived and the euro struck nine year lows against the dollar this week on renewed fears of a Greek exit from the eurozone if poll-leading leftists win snap elections this month in Athens.

Amid the instability, the first confirmed sign of a real fall in prices since the financial crisis could force the European Central Bank's hand to do more to prop up the single currency.

The European Commission insisted that it was confident the eurozone could avoid slipping into a deflationary spiral, in which businesses and households delay purchases, throttling demand, triggering recession and causing companies to lay off workers.

- Analysts pessimistic -

Spokeswoman Annika Breidthardt said low inflation would "continue for the short term, but we expect it to pick up again once the economy gradually strengthens and wages rise."

"We would like to point out the difference between deflation and temporary negative headline numbers," she told a daily briefing.

Analysts were more pessimistic, however.

"December’s sharp drop in euro-zone inflation into negative territory could herald the start of a prolonged and damaging bout of deflation in the currency union, which may in turn threaten to re-ignite the region’s debt crisis," said Jonathan Loynes, economist of Capital Economics in London.

Deflation is officially defined by prices falling over a longer period and the ECB is now under pressure to quickly put prices back in positive territory.

The ECB has previously cut interest rates to all-time lows but is now considering the possibility of large-scale purchases of sovereign debt, so-called "quantitative easing" or "QE".

- Low oil prices -

Energy prices in the eurozone, which added Lithuania on January 1, sank a huge 6.3 percent in December, greater than a fall of 2.6 percent a month earlier, when inflation was a still positive 0.3 percent.

Oil prices have plummeted in recent weeks, as OPEC maintains its production levels despite weak demand.

All other sectors were stable, with prices in the food and beverage sector as well as industrial goods unchanged, but still well below the ECB target of a near 2 percent increase.

The European Union's data agency Eurostat also reported that unemployment remained at 11.5 percent in November, unchanged from October, though the actual number of job seekers increased for the third month running.

The rise indicated "that prolonged muted eurozone economic activity and recent more fragile business confidence are currently weighing down on labour markets," said Howard Archer, chief economist at IHS Global Insight.

The eurozone added 34,000 job-seekers in November, reaching 18.39 million, though this was down 522,000 from a year ago and below the record of 19 million reached in June 2013.

The jobs picture was alarmingly varied across the eurozone with Germany at a near-record low 4.9 percent and Greece at a lower but still very high 25.7 percent, according to the latest data available.

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