Fears of deflation in the Eurozone have been confirmed, since consumer prices fell 0.2 percent in the last month of 2014, showing a negative number for the first time since the fateful Great Recession in October 2009, as EU official reports showed on January the 7th. Deflation is legally defined by a continuous falling of prices over a longer period.
The reason for the fatal drop were the plunging oil prices and will mound a lot of pressure on the European Central Bank to initiate a bold program of quantitative easing – large purchases of government bonds – in order to stimulate the economy and prop up prices in the Eurozone.
We might think that falling prices is good news for the common consumer. However, it could actually announce worse times to come for Europe’s declining economy, because lower prices encourage people to postpone purchases, hoping that deals will get even cheaper in the future.
The most affected parties, however, will be the central banks, because falling prices can trigger a vicious cycle, where businesses delay purchases, limiting demand, sparking recession and causing a lot of companies to lay off workers. In spite of these threats, the European Union’s data agency Eurostat also showed that unemployment rates remained at 11.5 percent in November. Deflation also affects long-term debt, making it a burden even harder to bear.
Energy prices in the Eurozone (which now includes Lithuania since January the 1st) took a hard fall of 6.3 percent in last December. Oil prices have also sunk in recent weeks, hit by a high supply and a weak demand.
The other sectors were not hit as hard, with the sector of food and beverage, as well as industrial goods, mostly unchanged. The ECB has been considering a new program for weeks, and it could present its launch as early as the end of January, after its next policy meeting.
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