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Eurozone Inflation Eases Unexpectedly In December

Eurozone Inflation 010714

Eurozone inflation slowed unexpectedly at the end of the year and producer prices remained in negative territory for the fourth consecutive month, adding pressure on the central bank to act decisively to stem deflationary risks and support growth.

The flash estimates from Eurostat on Tuesday showed that inflation slowed to 0.8 percent in December, while it was forecast to remain unchanged at 0.9 percent.

Inflation has stayed below the European Central Bank's target of 'below, but close to 2 percent' for the eleventh consecutive month.

Excluding energy, food, alcohol and tobacco, core inflation eased to 0.7 percent from 0.9 percent in November. The detailed report is due on January 16.

Cost of food, alcohol and tobacco advanced 1.8 percent and that of services gained 1 percent. At the same time, energy prices remained flat in December after declining 1.1 percent a month ago.

According to the latest ECB staff macroeconomic projections, inflation for 2013 was pegged at 1.5 percent. For 2014, inflation is seen at 1.3 percent.

Eurozone inflation looks unlikely to move back up markedly any time soon, IHS Global Insight's Chief European Economist Howard Archer said.

He expects the central bank to keep its refinancing rate at 0.25 percent through to 2015, although it is not inconceivable that it could trim it to 0.1 percent or even 0.0 percent.

Ben May at Capital Economics said the ECB is likely to refrain from providing additional policy support on Thursday. But, he expects further action in the months ahead.

Preliminary data released yesterday showed a slowdown in German inflation. Harmonized inflation in the largest Eurozone nation fell to 1.2 percent from 1.6 percent in November.

Another report from Eurostat showed that euro area producer prices continued its downward trend in November.

Industrial producer prices dropped 1.2 percent annually in November, which was slightly slower than the October's 1.3 percent fall. Economists had forecast a 1.3 percent decrease for November.

Driving the fall of the headline index, costs of intermediate goods and energy products decreased 1.7 percent and 3.2 percent, respectively.

Meanwhile, prices of capital goods and durable consumer goods increased 0.5 percent each from November 2012. Prices of non-durable consumer goods rose by 0.8 percent.

Compared to October, the producer price index dropped 0.1 percent in November, after easing 0.5 percent. A similar decrease was recorded in output prices in the European Union.

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