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Inflation in Germany Lowest in Five Years As Deflation Rises in Eurozone

Figures from Destatis, Germany’s federal statistics bureau indicate that the country’s inflation rates fell to 0.2% in December down from 0.6% a month earlier. This is the lowest the inflation rates have gone in five years.

Inflation in Germany Lowest in Five Years As Deflation Rises in Eurozone

The figures were released just prior to the release of the inflation rates in the Eurozone for December, which so far indicates that the bloc is steadily falling into a deflation.  In November, inflation in the euro zone was at 0.3% according to data from Eurostat, a figure that is below the European Bank target of 2%.

Several countries in the bloc including Italy and Spain are already experiencing deflation. Going by the Harmonised Index of Consumer Prices (HICP), inflation in Germany was much lower in December at 0.1%.

The low inflation rates in Germany might be an indication that the European Central Bank (ECB) needs to starts purchasing government bonds. In the last ECB meeting in December, the interest rates in the euro zone were left to stand at 0.05%, with Mario Draghi, the bank’s president asserting that they were well equipped to do anything that is necessary to boost inflation in the euro zone.


The effects of inflation and tumbling oil prices

Low inflation pushes consumer prices even lower. While this might be good news for consumers, it could also lead to job losses, slow economic activity and eventually a recession. 

At the low peaks of inflation, consumers and businesses alike postpone their purchases with the hope that prices will fall further down.  However, the spin off effect is that it can push the prices much lower forcing companies to close or to make their staff redundant.

In the summer of 2014, the ECB lowered the interest rates further and started buying assets to prop up the euro zone economy and keep deflation from spiraling out of control. Plunging oil prices have, however caused prices to fall even further in spite of efforts by the bank to boost prices upward.

According to Jennifer McKeown of Capital Economics, the low inflation rates in Germany are primarily as a result of the oil glut and inflation figures in the euro zone are likely to go into negative for the first time in five years.

McKeown said, ‘Negative inflation would raise the pressure for the ECB to finally implement its quantitative easing.

However, market analysts are concerned over the structuring of the quantitative easing programme proposed by the ECB. There are also questions as to whether the bond buying initiative will include Greek’s problematic bonds.


Anti-austerity Syriza party wins in Greece

The Syriza party has won in the general election in Greece, a move that could put the party in collision with the proposed quantitative easing in EU. The far-left party has vowed to backtrack on the austerity initiatives that were a condition for the country to be bailed out.

The results of the election are a firm indication of Greece’s rejection of the policies formulated in Berlin and Brussels to deal with the euro zone crisis.  This will be a major talking point for Eurozone finance minister as they rush to keep the bloc from an official recession.


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