By Paul Hannon
Europe's struggle to avoid a slide into deflation suffered a
setback in November, as consumer prices across the European Union's
28 members rose at the slowest annual pace in five years.
The bloc's statistics agency on Wednesday confirmed that
consumer prices in the 18 countries that share the euro were just
0.3% higher than in the same month of 2013, while they were 0.4%
higher in the EU as a whole. In October, the annual rates of
inflation were 0.4% and 0.5%, respectively.
In both the eurozone and the EU, that returned the inflation
rate to September lows that hadn't been matched since October and
September of 2009 respectively.
With oil prices tumbling, inflation rates around the continent
appear likely to decline further in coming months, and may turn
negative in the early months of next year as prices fall below
their levels of a year earlier.
Economists at Citibank lowered their near-term inflation
forecasts on Wednesday and now expect prices in December to be 0.1%
lower than a year earlier, with prices in January down 0.2%. The
last time prices were lower than a year earlier was in September
2009, following the sharp economic contraction that followed the
onset of the financial crisis in late 2008.
The European Central Bank has said it will reassess its existing
stimulus policies, which include cheap bank loans and purchases of
asset-backed securities and covered bonds, in early 2015, and
decide whether to do more to ensure that annual inflation moves
closer to its target of just below 2%.
Other central banks across Europe face similar challenges.
Sweden's Riksbank on Tuesday listed a range of options it would
consider if the outlook for inflation were to continue to worsen,
including asset buying, lending to banks, a negative main rate and
currency market interventions.
In an interview with The Wall Street Journal on Monday, Polish
rate-setter Jerzy Hausner said the central bank should consider
cutting its benchmark interest rate again if prices continued to
fall early next year.
The problem of low inflation is now being felt even in the U.K.,
which typically has higher inflation rates than elsewhere.
Its measure of inflation fell to a 12-year low of 1% in
November, and Bank of England Governor Mark Carney acknowledged it
will fall further, requiring him to write a letter to the
government explaining why the central bank had failed to meet its
inflation target.
When inflation rates were higher, policy makers would likely
have ignored falling oil prices, expecting the boost to real
household spending power to compensate over the medium term as
prices of other goods and services rose.
But the very low levels of inflation across Europe can be
harmful to economic growth, crimping company profits and
investment, while making it more difficult for governments and
households to reduce high levels of debt.
And a slide into deflation would exacerbate those problems.
Policy makers worry that if consumer prices start to fall,
businesses and households will start to postpone spending decisions
in the expectation that goods will be cheaper in the future. That
in turn can become a self-fulfilling spiral, and the case of Japan
has shown how difficult it can be to revive growth after deflation
has taken hold.
"While the ECB would normally look through any drops in the
headline eurozone inflation rate resulting from falling oil prices,
the bank will be seriously concerned that this will lead to a
further weakening in inflation expectations that then feeds through
to result in a further drop in already worryingly low core
inflation," said Howard Archer, an economist at IHS.
Still, some key policy makers believe the risk of a slide into a
prolonged period of deflation remains very low.
"For me, a few months of inflation rates below zero does not
constitute deflation. That would require a self-perpetuating
downward spiral of negative inflation rates, GDP declines and wage
declines," Jens Weidmann, president of Germany's Bundesbank and a
member of the ECB's governing council, told reporters Monday. "This
risk remains minimal."
Separate figures released by Eurostat show wage rises remained
at modest levels in the three months to September, and are
therefore unlikely to contribute to a pickup in inflation.
Total hourly labor costs were up 1.3% from the third quarter of
2013, a slight slowdown from the 1.4% rate of increase recorded in
the second quarter. Wage rises were unchanged at 1.4%.
Write to Paul Hannon at paul.hannon@wsj.com