German inflation raises QE stakes

German inflation slowed to its lowest level in over five years in December, raising pressure on European Central Bank president Mario Draghi to unveil unconventional measures later this month to ward off a deflationary spiral in the eurozone.

Preliminary data showed yesterday that annual inflation, harmonised for comparison with other European countries, fell to just 0.1% from 0.5% in November.

Non-harmonised data showed consumer prices increasing 0.2% year-on-year in December, down from 0.6% in the previous month.

Both readings were below the expectations of economists polled by Reuters and represented the lowest readings since October 2009.

The slowdown, which was driven by a fall in energy prices, reinforced expectations that the ECB will decide at a meeting later this month to buy the debt of eurozone governments, aiming to push inflation back up towards its target of just below 2%.

“It is very possible that the inflation rate in the euro- zone will turn negative,” said Holger Sandte, an economist at Nordea Bank. “That increases the likelihood that the ECB will announce a bond-buying programme on January 22.”

Inflation data for the entire 19-nation eurozone is due tomorrow. The evidence of slowing German inflation came days after Mr Draghi gave an extensive interview to German daily Handelsblatt in which he warned that the downside risks to price stability had risen over the past half year.

He also confirmed that the ECB stood ready to introduce new measures if necessary in early 2015.

Speculation is rife that Mr Draghi could unveil plans for mass purchases of eurozone government bonds — a step known as quantitative easing (QE) — to tackle the threat of deflation.

The inflation data could give him additional ammunition to convince wavering members of the ECB’s governing council to back QE, though Bundesbank President Jens Weidmann has signalled that he will oppose such a step.

Jennifer McKeown at Capital Economics, said that if prices in the eurozone fell in December, the pressure for QE would become “irresistible”.

The big question for the markets is how the ECB might structure a QE programme — for example whether Greek bonds will be included given uncertainty over the outcome of an election being held on January 25, three days after the next ECB meeting.

The far-left Syriza party,which has vowed to reverse the austerity measures that were a condition for Greek bailout packages totalling €240bn, holds a narrow lead in opinion polls.

* Reuters