World Economy

Euro zone slips into deflation, pressure on ECB

Euro zone in deflation
Euro zone in deflation

The specter of growth-sapping deflation finally materialized in the euro zone on Wednesday, with new data confirming that the region had entered a period of falling consumer prices.

Prices in the euro zone fell 0.2 percent year-on-year in December, marking the first time since 2009 that prices have dipped into negative territory. This is likely to add yet more pressure on the European Central Bank (ECB) to launch a U.S. Federal-Reserve-style bond-buying program.

Wednesday's flash estimate was below market expectations of a 0.1 percent fall and lower than November's 0.3 percent rise.

Deflation - when consumer prices fall instead of rise - is seen as concerning by many economists, as shoppers hold off on purchases in the hope of further price falls, which puts a brake on the broader economy.

Energy was the main laggard during December that tipped the headline figure into negative territory. Oil prices have seen a dramatic 57 percent fall since mid-June and have weighed heavily on global statistics. Energy prices sank 6.3 percent last month, compared to a fall of 2.6 percent in November, according to Eurostat.


Meanwhile, the unemployment rate in the euro zone held steady at 11.5 percent in November, the same figure for the month before.

Euro reaction

A poster advertises "Up To 50% discount" in Rome, Italy
Alessia Pierdomenico | Bloomberg | Getty Images

"It's a poor reading," Daniele Antonucci, a European economist at Morgan Stanley, told CNBC Wednesday, indicating that it was a downward surprise.

The fresh figures come after disappointing data from Germany on Monday, which is traditionally seen as the economic powerhouse of the euro zone. Annual flash inflation figures for the country slowed to its lowest level in over five years last month, falling to just 0.1 percent from 0.5 percent last month. It was this figure, Antonucci said, that was likely to have caused the adjustment and made the inflation rate miss estimates.

Europe's single currency hit a new 9-year low against the dollar after the release, falling to 1.1840. European stocks surged on the data, with traders expecting more stimulus from the ECB.

The euro zone's currency has slipped nearly 2 percent against the U.S. dollar so far this year after depreciating 12 percent in the whole of 2014. Market-watchers are keenly anticipating the announcement of a full-scale quantitative easing (QE) program by Mario Draghi, ECB President.

Any announcement - which could come at the ECB's next meeting on January 22 - is expected to include the purchasing of government securities and would add onto its current measures of buying covered bonds and asset backed securities in the private sector and providing cheap loans to banks. The move might not be universally welcomed, however: central bankers and government officials in Germany have long been warning against such a move.

Read MoreHere's why European QE may not work

Fed-style QE?

Full-blown QE is being seen by economists as increasingly essential as inflation in the euro zone continues to fall. The figures continue to sit well below the ECB's 2-percent target.

Morgan Stanley's Antonucci said the possibly of QE in Europe hadn't necessarily increased after Wednesday's figure, adding that the central bank would have a more long-term view of the state of the euro zone.

"What matters is more the (inflation) outlook rather than one single inflation point," he said.