EUROPEAN DEFLATION IS HERE

Draghi rubbing headREUTERS/Stefan WermuthThis puts even more pressure on Mario Draghi, ECB president.

After a year of anticipation, deflation has finally arrived in Europe. Consumer prices dropped 0.2% in the year to December.

The consensus was that inflation would drop to about zero or -0.1%.

Inflation in Germany, Europe’s healthiest large economy, is at just 0.1%.

Spain has already recorded months of deflation, and its consumer prices fell 1.1% in December from the same time last year.

With oil prices still tumbling today, it’s clear that falling consumer price inflation still has further to go. 

Nobody is disputing what pushed inflation over the zero mark. It’s the decline in oil prices:

This is going to put even more pressure on the European Central Bank, which is nowhere near its 2% inflation target.

The ECB is now expected to go for a quantitative easing programme this month, promising to make big financial asset purchases. But the size of the programme, as well as any dissent against it from inside the ECB, still remains to be seen. 

The one positive takeaway for ECB President Mario Draghi is that core inflation, which strips out the cost of volatile items (like fuel, which is most affected by oil) ticked up a little to 0.8%.

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