Eurozone in deflation territory as prices plunge

The eurozone slipped into deflationary territory for the first time since 2009 after prices dropped in December, official figures showed Wednesday, challenging the ECB to take action to avert a new economic crisis in Europe.

Inflation in the single currency area was at minus 0.2 percent last month, dragged down by plummeting oil prices and signalling big problems ahead with renewed crisis in debt-plagued Greece also on the horizon.

World stocks nosedived and the euro struck nine-year lows against the dollar this week on renewed fears of a Greek exit from the eurozone if poll-leading leftists win snap elections this month in Athens.

The last time consumer prices fell in October 2009 was at the height of the global financial crisis.

Amid the instability, the first confirmed sign of a fall in consumer prices since the last crisis could force the European Central Bank to act more boldly to prop up the single currency.

Analysts pessimistic

The European Commission insisted Wednesday that "temporary negative" prices were different from true long-term deflation.

In a deflationary spiral, businesses and households delay purchases, throttling demand, triggering recession and causing companies to lay off workers.

Spokeswoman Annika Breidthardt said low inflation would "continue for the short term, but we expect it to pick up again once the economy gradually strengthens and wages rise."

Analysts were more pessimistic, however.

"December’s sharp drop ... could herald the start of a prolonged and damaging bout of deflation in the currency union, which may in turn threaten to re-ignite the region’s debt crisis," said Jonathan Loynes, economist of Capital Economics in London.

Deflation is officially defined by prices falling over a prolonged period, and the ECB is now under pressure to reverse the trend quickly.

The usually cautious ECB has already cut interest rates to all-time lows but is now considering the possibility of large-scale purchases of sovereign debt, so-called "quantitative easing" or QE.

Low oil prices

Energy prices in the eurozone, which added Lithuania on January 1, sank a huge 6.3 percent in December, greater than a fall of 2.6 percent a month earlier, when inflation was a still positive 0.3 percent.

Oil prices have plummeted in recent weeks, as OPEC maintains its production levels despite weak demand.

All other sectors were stable, with prices in the food and beverage sector as well as industrial goods unchanged.

But even at stable levels, inflation remains well below the ECB target of just under two percent, and bank head Mario Draghi will be under pressure to act.

"Overall, the inflation figures pile yet more pressure onto the ECB to deliver a sizeable quantitative easing programme at its policy meeting later this month," Loynes said.

"But it’s too late to save the eurozone from a period of deflation – and possibly a long and damaging one," he added.

The European Union's data agency Eurostat also reported that unemployment remained at 11.5 percent in November, unchanged from October, though the actual number of job-seekers increased for the third month running.

The rise indicated "that prolonged muted eurozone economic activity and recent more fragile business confidence are currently weighing down on labour markets," said Howard Archer, chief economist at IHS Global Insight.

The eurozone added 34,000 job-seekers in November, reaching 18.39 million, though this was down 522,000 from a year ago and below the record of just over 19 million reached in June 2013.

The jobs picture was alarmingly varied across the eurozone with Germany at a near-record low 4.9 percent and Greece at a lower but still very high 25.7 percent, according to the latest data available.