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Analysis

Euro area inflation

by Gabriel Stein

Mon 3 Feb 2014

Euro area inflation Enlarge Chart loading Image

What the chart shows: The chart shows the 12 month change in euro area consumer prices, both the headline rate and a core rate (excluding food and energy).

Why the chart is important: We last looked at euro area inflation in October 2013. At that stage, the 12 month rate of inflation was 0.7%, while the core rate was 1%. The debate about the risk of deflation in the euro area had begun, but was still relatively quiescent. Four months later, this is becoming an issue of some urgency. That is for two reasons. First, because although inflation edged up minimally in November and December, the flash indicator for January shows it back at 0.7%; while the core rate has dropped from 1% to 0.8%. Second, because the European Central Bank (ECB) seems to remain remarkably unconcerned about this issue. This may be a façade – President Draghi has said that the bank is ready to act to ward of deflation, even as he downplayed the risk of it occurring. But the only measure so far mooted is purchases of securitised bank loans. This is a minor, underdeveloped market within the euro area; more to the point, its impact on countering deflationary pressures is probably non-existent. Deflation may not occur – but the problems it would cause in the still debt-laden euro area is such that the ECB should act forcefully to deflect it.

Chart and comments provided by Oxford Economics www.oxfordeconomics.com