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Slowing German Inflation Boosts Case for ECB Action

Slowing German Inflation Boosts Case for ECB Action Slowing German Inflation Boosts Case for ECB Action

Germany is the latest eurozone country to fall prey to the forces of deflation, as it saw the lowest rise in consumer prices since October 2009.

Monthly consumer price inflation was just 0.1 percent, down from 0.5 percent in November and missing economists’ expectations. Economists had expected inflation of 0.2 percent, Business Recorder reported Monday.

The sharp slowdown in inflation in Europe’s biggest economy will fuel fears that prices across the entire eurozone could begin falling and tip the region into deflation - a sustained and widespread drop in prices that hampers economic activity and could lead to job losses.

While falling prices may sound good for consumers, deflation can trigger a vicious spiral in which businesses and households delay purchases, throttling demand and causing companies to lay off workers, AFP said.

The news is likely to put further pressure on European Central Bank president Mario Draghi to inject further stimulus into the flailing monetary bloc when the ECB meets on January 22.

Regional inflation data for the country also pointed to disinflationary forces gripping the country.

Consumer prices in North Rhine-Westphalia eked up by just 0.1 percent in December, down sharply from a 0.7 percent in the previous month, while inflation in Bavaria rose by 0.3 percent year-on-year, down from 0.8 percent.

Speaking to a German newspaper last week, Draghi admitted “the risk that we do not fulfill our mandate of price stability is higher than six months ago.”

His comments helped send the euro to a nine-year low against the dollar in Monday’s trading.

Deflation increases the debt burden on governments and encourages consumers to delay spending. Falling global energy prices contributed to Germany’s overall national inflation rate to drop to 0.2 percent in December, down from 0.6 percent in the previous month.

  Yields Sink

Government bond yields fell to new record lows across the eurozone on Friday on expectations the European Central Bank is set to fight slowing inflation with new stimulus measures in the new year. German, French, Italian, Spanish, Irish, Dutch, Portuguese, Belgian and Finnish yields hit record lows after ECB President Mario Draghi said the bank would act to keep consumer prices stable.

German five-year yields fell below zero and 10-year Bund yields fell below 0.50 percent for the first time. The gap between 10-year Spanish and German yields fell below 100 basis points for the first time since 2010.

Economists polled by Reuters expect the eurozone to report consumer prices fell in December by 0.1 percent when data is released on January 7. That could prompt the ECB to begin a program of sovereign bond purchases – so-called quantitative easing – as early as its first meeting, on January 22.

“It is quite clear that the ECB is preparing to do more and expectations are centering on the January meeting,” said Nordea strategist Jan von Gerich. “The way markets have developed, it is a clear signal that the ECB cannot afford to wait that much longer.” High-yielding bonds in the bloc’s southern periphery are expected to outperform those with lower yields if the ECB launches such a scheme. Yields fall as prices rise.

Italian and Spanish 10-year yields fell about 10 basis points to 1.77 percent and 1.52 percent. Portuguese yields dropped 23 bps to 2.47 percent. Bund yields dipped 5 bps to 0.49 percent. Greek debt yields – shaken last week by the prospect of elections this month that could catapult the anti-austerity Syriza party to power - fell 41 bps to 9.23 percent.

 

Financialtribune.com