With the estimated inflation for the Eurozone in January 2014 falling back to 0.7 percent as well as the unemployment rate there still in the region of 12 percent there are worries that any Eurozone economic recovery could be derailed by deflation.

The Zone’s annual inflation rate [1] fell back from 2 percent in January 2012 to its current 0.7 percent and it has been falling consistently in recent months. And apart from a couple of blips this has been happening across all components of the Euro Area harmonised indices of consumer prices (HICP).

The Euro Area unemployment rate [2] for December 2013 at 12 percent was virtually unchanged from last year’s 11.9 percent and is higher than the EU as a whole where unemployment is at 10.7 percent.

The youth unemployment rate in the Euro Area was 23.8 percent in December compared to the EU where it was 23.2 percent. A year earlier in December 2012 youth unemployment ran at 23.9 percent in the Euro Area and 23.6 in the EU as a whole.

EZ Inflation to Jan 2013

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Commenting on the inflation figures Azad Zangana, European Economist at Schroders said:

"The flash estimate for Eurozone inflation in January showed a fall in the annual rate of inflation to 0.7%, compared to 0.8% at the end of 2013. The fall in annual inflation surprised economists, which had expected a rise to 0.9%.

"Within the details, core inflation (excluding energy, food, alcohol & tobacco) increased from 0.7% to 0.8%. Given that core inflation is now higher than headline inflation highlights the negative impact from the more volatile categories of goods and services. January is usually a month impacted by changes to regulated prices, especially in home energy markets. The lower headline inflation over the past year will have now fed through into lower rises in these regulated prices, compounding the weak inflation seen of late.

"The low levels of inflation are leading many investors to question whether the Eurozone is slowly slipping into a Japanese style deflationary downward spiral. At this stage, we do not believe the Eurozone has entered an outright deflationary trend, however, the risks are rising. The low inflation figures could prompt the European Central Bank to add more stimulus in the near future, however, the ECB has largely exhausted the tools at its disposal, or at least those tools that Germany is willing to tolerate."

[1] http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-31012014-BP/EN/2-31012014-BP-EN.PDF

[2] http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/3-31012014-AP/EN/3-31012014-AP-EN.PDF

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