Europe deflation fears back after weak Spain, Greece data

Fears of deflation in the euro zone were heightened once again on Tuesday, after both Spain and Greece reported worse-than-expected price declines.

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A flash reading for consumer price index (CPI) inflation in Spain showed that prices fell by 1.1 percent year-on-year in December. This was below forecasts of a 0.7 percent drop, and followed November's decline of 0.5 percent.

Analysts said this month's fall was mainly driven by weakening oil prices—which could mean that other large euro zone members fall victim to deflation soon.

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"With a Spanish reading this low, euro area inflation might well turn negative as early as December," said Robert Kuenzel, director of euro area economic research at Daiwa Capital Markets, in a research note on Tuesday.

Meanwhile, data out from Greece showed that producer prices declined 2.3 percent year-on-year in November – way below October's 0.9 percent fall. Consumer prices in the country fell by 1.2 percent in the same period.

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Kuenzel told CNBC that the producer price drop in Greece was worse than he expected, and was "one of the largest fall we have seen for years."

"As producer prices are more energy price-sensitive, this is still not out of line with today's downside Spanish CPI surprise, even though that was numerically smaller," he said via email.

Brent crude oil prices fell to a 5-½-year low under $57 per barrel on Tuesday, extending losses into a fourth trading session.

Oxford Economics has warned that a multitude of European countries face deflation next year if oil prices remain below $60, including the U.K., France, Switzerland and Italy.

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