The Eurozone Is Tumbling Into Its Deepest Deflation Ever

Europe’s deflation deepened in January — prices fell 0.6% year over year.

That’s a joint-record low for the 15-year-old currency union, matching the drop seen in 2009, when prices tumbled immediately after the financial crisis. 

The core figure is being closely watched — it fell back to 0.7% in December and plunged to 0.5% in January: That’s the lowest in the eurozone’s history, too.

The figure tries to measure inflation but strips out very volatile items like food and, crucially, energy. Eurozone inflation has been dropping for a couple of years, but falling oil prices have finally pushed the index into negative territory.

Spanish prices in December fell 1.5%, the steepest drop of any major eurozone economy, and Germany joined the club in January with prices down 0.5% year on year.

Food prices and industrial goods are falling a little, but it’s clear that the near 9% plunge in energy prices is driving the collapse. 

Deflation makes it more and more difficult for the eurozone governments to get their sovereign debts under control: When €1 is worth more tomorrow than it is today, any debts you make in euros are effectively growing.

If prices keep falling and firms decide not to raise wages as a result, deflation can become self-fulfilling, a sort of vicious cycle that economists sometimes call a deflationary spiral. Once people expect deflation to continue, it can be hard to change that. 

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