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Unexpected Drop in Euro Area Inflation Puts Pressure Back on ECB

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Unexpected Drop in Euro Area Inflation Puts Pressure Back on ECB

Consumer inflation in the euro region fell back to record lows in January, creating fresh headaches for policymakers ahead of next week’s interest rate decision.

The European Commission’s gauge of consumer inflation eased to 0.7 percent annually in January, compared to 0.8 percent the prior month. Economists forecasted inflation to rise to 0.9 percent in January. The so-called core measure, which excludes volatile products such as food and energy, increased from 0.7 percent to 0.8 percent, official data showed.

Falling energy prices were the biggest factor behind the unexpected drop. Energy prices declined 1.2 percent in January, after stagnating the previous month. Food, alcohol and tobacco products rose 1.7 percent, while services rose 1.1 percent.

The threat of deflation puts the pressure back on the European Central Bank, which will coalesce in Frankfurt, Germany next week to discuss monetary policy and set the interest rate. The ECB has been relatively confident deflation poses no serious risk to Eurozone recovery. However, that sentiment isn’t shared by the markets. Some economists are forecasting further monetary easing, which could see the benchmark rate drop to 0.1 percent. The ECB is also believed to be considering more unconventional methods, such as negative deposit rates.

The threat of deflation became very real in October, when consumer inflation fell to 0.7 percent annually. In response, the ECB slashed interest rates in half. As inflation continues to trend well below the ECB’s target rate of 2 percent, further policy measures could be taken to ensure the Eurozone doesn’t spiral back into recession.

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