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Eurozone Data on Consumer Prices and Unemployment Stoke Concern Fall in Eurozone Prices Inflames Fears of Deflation
(about 7 hours later)
FRANKFURT — Consumer prices in the 19-country eurozone fell for a second consecutive month in January, while unemployment remained in double digits, according to an official estimate released on Friday. FRANKFURT — Consumer prices in the 19-country eurozone fell in January for a second consecutive month, compared with a year earlier, according to data released Friday.
Together, the data reinforce fears that the region could lapse into a sustained period of falling prices that could lead to an even higher jobless rate and economic stagnation. Together, the data reinforce fears that the region could lapse into a sustained period of sluggish or falling prices that could lead to an even higher jobless rate and economic stagnation.
The reports are likely to be seen as validation of the decision last week by the European Central Bank to begin big purchases of government bonds and other debt, in an attempt to pump cash into the economy and raise inflation closer to the official target of close to 2 percent. But among economists there is a divergence of opinion about whether the fears are justified. Some say the 19 nations in the currency bloc have been in de facto deflation for months. Others say falling prices are a boon for consumers and no reason for panic.
A nearly 9 percent drop in the oil prices and other energy costs accounted for most of the decline. Deflation — a vicious cycle of declining business revenue, sagging wages and rising joblessness — has been a marker of economic disaster. The United States had deflation during the Great Depression. Germany had deflation just before Hitler took over. Japan is still trying to escape a vicious deflationary circle that began in the 1990s.
Most alarming for some economists, though, was a historic low in the so-called core inflation rate — an underlying measurement that does not count things like energy, food, alcohol and tobacco, whose prices often fluctuate greatly from month to month. Fear of worryingly low inflation was a big reason the European Central Bank recently decided to begin a big program of bond buying, in hopes of stimulating the eurozone economy and nudging inflation closer to its target of just below 2 percent.
Although prices as measured by core inflation did not actually fall, the inflation rate dipped in January to a level that economists consider worrisomely low — falling to 0.6 percent, from 0.7 percent in December. It was the lowest core inflation rate since the euro was introduced in 1999. ”The average citizen in the world does not understand the consequences of what deflation is,” Anthony Scaramucci, founder of SkyBridge Capital, in investment fund, said recently at the World Economic Forum in Davos. “It’s the Darth Vader death star outside of the atmosphere of the Earth shooting a laser to blow up the world.”
Other economists say that the current modest decline of prices in the eurozone, caused largely by plunging oil prices, is benign — and even beneficial. ”Deflation is one of the most abused terms in economic history,” said Jörg Krämer, chief economist of Commerzbank in Frankfurt.
He said that falling wages and prices in countries like Greece and Spain were helping to restore them to international competitiveness. And price declines have effectively raised the disposable incomes of eurozone consumers by 1 percent. “This is positive deflation,” he said.
On Friday, the European Union statistics bureau, Eurostat, said consumer prices fell by 0.6 percent in January after a decline of 0.2 percent in December. A nearly 9 percent drop in the oil prices and other energy costs accounted for most of the decline.
What alarmed some economists, though, was a low in the eurozone’s so-called core inflation rate, which does not count things like energy, food, alcohol and tobacco, whose prices often fluctuate greatly.
Although prices as measured by core inflation did not actually fall, the rate of increase dipped in January to a level that economists consider worrisomely low — 0.6 percent, down from 0.7 percent in December.
“The real cause for concern lies in the slowdown in core inflation, and in services prices,” Tom Rogers, an economist who advises the consulting firm Ernst & Young, said in an email.“The real cause for concern lies in the slowdown in core inflation, and in services prices,” Tom Rogers, an economist who advises the consulting firm Ernst & Young, said in an email.
The continuing concern for the eurozone is that dangerously low inflation will give way to outright deflation — a sustained period of falling prices that can undermine the economy and be hard to escape once it sets in. Price declines become toxic when consumers begin to delay purchases in anticipation of even lower prices. When consumer spending falls, companies earn less revenue and face pressure to dismiss workers or cut wages, creating a vicious circle of declining economic activity.
“The relative stability in these parts of the overall index over the past year or so has offered room to remain optimistic that weaker inflation would not lead toward outright deflation,” Mr. Rogers said, referring to the core inflation rate. “This is no longer the case.” It was that risk that helped prompt the European Central Bank to announce on Jan. 22 that it would spend 1.1 trillion euros, or $1.24 trillion, through September 2016 buying eurozone government bonds and other assets.
Taken by itself, the unemployment rate provided a glimmer of good news, dipping to 11.4 percent in December after coming in at 11.5 percent in November, according to Eurostat, the statistics agency for the European Union. Economists had expected the rate to stay at 11.5 percent. Stefano Micossi, director general of Assonime, an association of publicly listed Italian companies, said he was worried about deflation until the central bank acted. Now, he said Friday, he has become more optimistic.
The jobless rate was the lowest in the eurozone since August 2012, and declined in many of the eurozone’s hardest-hit countries, including Italy and Greece. ”What we have now is really a powerful monetary expansion,” Mr. Micossi said. “It comes at the right time. The fall of the economy is coming to a halt.”
The number of jobless people in the eurozone fell 157,000, to 18.1 million. In all 28 countries in the European Union, the unemployment fell to 9.9 percent from 10 percent, the first time it was in single digits since October 2011. In fact, the unemployment data published Friday provided a glimmer of good news. The jobless rate in the eurozone dipped to 11.4 percent in December after coming in at 11.5 percent in November, according to Eurostat. Economists had expected the rate to stay at 11.5 percent.
But unemployment remained at catastrophic levels in many countries. The rate in Spain, for example, barely budged — at 23.7 percent in December, compared with 23.8 percent in November. In all 28 countries in the European Union, unemployment fell to 9.9 percent from 10 percent, the first time it was in single digits since October 2011.
Consumer prices in the eurozone fell 0.6 percent in January — a slightly bigger drop than the 0.5 percent analysts had forecast. The eurozone has experienced periods of falling prices before. Consumer prices fell for five months in 2009, during the global financial crisis, with a 0.6 percent decline in July of that year, compared with a year earlier. But inflation returned and rose quickly as the eurozone began to recover.
But some analysts had revised their forecasts downward after data published on Thursday showed a larger-than-expected fall in prices in Germany, the eurozone’s largest economy. Consumer prices in Germany fell 0.3 percent in January, according to an official estimate. The current bout of falling prices, though, comes after six years of weak growth, and many economists are pessimistic about the prospect of a quick recovery. Despite modest progress, countries like France and Italy need to do more to improve economic performance, many say, such as revising labor laws or streamlining approval procedures for businesses.
The second consecutive month of declining prices in the eurozone, after they fell 0.2 percent in December, supports the European Central Bank’s plan announced last week to buy government bonds in an attempt to pump cash into the economy. In addition, countries that have healthy government budget surpluses, like Germany, have been reluctant to spend more on public works to stimulate growth. Germany’s unemployment rate, at 4.8 percent in December, was the lowest in the eurozone.
“Today’s inflation numbers fully vindicate the E.C.B.’s decision to embark on Q.E.,” Teunis Brosens, an analyst at ING Bank, said in a note to clients, referring to quantitative easing, as the bond-buying program is known. Many economists say that the central bank stimulus, which will involve buying 60 billion in eurozone assets each month starting in March, will be of little use unless governments do their part by creating conditions for better job creation.
The data will also support the arguments of economists who say that the eurozone is already in deflation, a condition in which consumers delay purchases because they expect prices to fall further. When consumer spending falls, companies earn less revenue and face pressure to dismiss workers or cut wages, creating a vicious circle of declining economic activity. That is also a common refrain among business executives like Maximilian Zimmerer, chief financial officer of German insurer Allianz. Mr. Zimmerer said eurozone countries needed to do more to become competitive.
Other economists argue that the decline in prices is a temporary phenomenon linked to the steep fall in oil prices, and is no cause for alarm. Some even say that modest deflation is good, because it increases consumer-spending power. “There are still a lot of reforms to be done,” Mr. Zimmerer said in an interview. “That’s for sure.”
“The slump of oil prices is a blessing for the sluggish economy in the eurozone,” Christoph Weil, an economist at Commerzbank in Frankfurt, said in a note to clients. “Consumers have to pay less for energy and have more money to spend on other things.”
Consumer prices in the eurozone fell for five months in 2009, during the global financial crisis, reaching a low of minus 0.6 percent in July of that year. But inflation returned and rose again quickly as the eurozone began to recover from the sharp downturn.
But the current bout of falling prices comes after six years of only weak growth, and many economists are pessimistic about the chances for a quick recovery. Countries including France and Italy have not made the changes needed to improve economic performance, many say, such as revising labor laws or streamlining approval procedures for businesses.
In addition, countries that have healthy government budgets, like Germany, have been reluctant to spend more on public works to stimulate growth. Germany’s unemployment rate, at 4.8 percent in December, was the lowest in the eurozone.
The unemployment rate also fell in Italy, to 12.9 percent from 13.3 percent. But the rate in France was unchanged at 10.3 percent. The two countries have faced criticism for failing to make changes in labor laws that would encourage hiring.
Many economists argue that the central bank stimulus, which will involve buying €60 billion in eurozone assets each month starting in March, will be of little use unless eurozone governments do their part by creating conditions for better job creation.