Plunging oil prices drive eurozone into deflation

Eurostat attributed the deflation to a 6.3 percent fall in energy prices, noting that prices remained unchanged for food, alcohol and tobacco. It added that prices increased 0.6 percent, excluding energy.

Oil prices have slumped in recent months falling from $100 a barrel last July to below $50 a barrel for the first time since May 2009 on Wednesday. Prices during December ranged between $60-65 per barrel, making it likely that energy prices will continue to fall in the coming months as they are passed to motorists at the petrol pump.

The combination of plunging oil prices and weak demand in the the eurozone economy will pile further pressure on the European Central Bank to expand its intervention to stimulate demand.

Prices fall when consumers and businesses delay purchases and consumption, which in turn reduces overall economic activity and can lead to a so-called 'deflationary spiral'.

In an interview with German media last week, ECB chief Mario Draghi remarked that falling oil prices and weak consumer demand had increased the risk of negative inflation, commenting that “the risks of not fulfilling our mandate of price stability are in any case higher than they were six months ago”.

Under its mandate of maintaining price stability across the eurozone, the ECB is required to keep price increases as close to 2 percent as possible.

Draghi added that “concrete measures” were being prepared to establish a programme of government bond buying in the coming weeks.

This would see the ECB follow in the footsteps of the US Federal Reserve and the Bank of England, hoping that injecting more cash into the economy will drive up demand and force up prices.

New programmes could be announced as soon as January 22nd when the ECB’s governing council holds its next meeting.