Deflation risk in the euro zone ruled out for now

According to the latest data delivered by Eurostat, the European Union’s (EU) statistical agency, consumer prices have increased at a record pace since September 2013 among the 19 euro area member countries. The energy sector, marked by the rise in oil prices (WTI) from about 30 dollars per barrel a year ago to 55 dollars per barrel presently, has largely contributed to doubling the annual inflation rate from 0.6% in November 2016 to 1.1% in December 2016.

“Oil prices have risen following the November 30, 2016 OPEC agreement and the effects of past oil price declines on global headline inflation are slowly diminishing. However, the still abundant global spare capacity is restraining underlying inflation,” carefully reminded the European Central Bank (ECB)’s latest economic bulletin. While technically speaking the deflationary risk is therefore set aside, it is not completely so as inflation remains low on consumer staples with an inflation rate of only 0.9% in December 2016.

Despite the ECB’s very accommodative policy for the past two years, the medium-term objective “close to 2%” is far from being reached. The lack of structural reform associated with the continuation of a crisis context with stagnating wages, high unemployment and growing public debt would explain, according to sources close to the ECB, the current situation which is “not good enough but not so bad.”