As European Central Bank prepares to start stimulus, rate of decline in eurozone prices eases

Photo: The Canadian Press. All rights reserved.

German Chancellor Angela Merkel, right, and President of the European Commission Jean-Claude Juncker attend a conference on innovation and competitiveness hosted by the European Investment Bank in Berlin, Germany, Monday, March 2, 2015. (AP Photo/Markus Schreiber)

LONDON - The 19-country eurozone got a double dose of mildly positive economic news Monday that will likely be met with relief by the European Central Bank's policymakers as they prepare to hold their next meeting on the Mediterranean island of Cyprus.

Official figures from Eurostat showed that the fall in consumer prices eased notably in February, a development that will temper the more alarming predictions that the region is sliding into a protracted period of deflation. Separately, the statistics agency found unemployment in the region fell in January to 11.2 per cent, its lowest level in nearly three years, amid signs that the recovery is gaining some momentum.

Making sure falling prices don't become entrenched — causing long-term economic stagnation — is the primary economic goal of the European Central Bank, which holds its next policy meeting on Thursday. It will gather in Nicosia, the Cypriot capital, one of two meetings it holds every year away from its Frankfurt headquarters to stress its role as the monetary authority for all the states using the euro.

Following an announcement in January, the ECB is due to start a massive bond-buying program this month as part of a drive to get inflation back toward its target of just below 2 per cent. More details on the mechanics of the program are expected Thursday.

The bank's president, Mario Draghi, and his peers on the governing council may find some comfort in Monday's news that consumer prices in the eurozone were 0.3 per cent lower in February compared with a year earlier, half the rate of decline recorded in January. Prices have been dropping on an annual basis for three months, but February's rate was slightly less than the 0.4 per cent drop markets were anticipating.

Once again, lower energy prices were largely responsible for the decline, down a whopping 7.9 per cent on the previous year. Stripping out volatile items such as energy, food, alcohol and tobacco, the so-called core inflation rate held up at 0.6 per cent, with the services sector showing an uptick in prices.

Lower prices may sound good in principle, especially if they are due to a fall in oil prices — the euros saved filling up a car can be used elsewhere, promoting economic activity.

The problem arises when the fall in prices endures, a situation that is often referred to as a deflationary spiral. That can choke the life out of an economy if consumers put off purchases in the hope of future bargains. It can also erode companies' profits and make governments' debts appear greater. Deflation can also prove difficult to reverse, as evidenced by the case of Japan.

That's why the ECB has embarked on its new course. Proponents of the stimulus, which is set to be worth around a trillion euros ($1.12 trillion), say the policy can help shore up the recovery in the eurozone and support prices by reducing the borrowing costs for businesses, households and governments. The associated fall in the currency — the euro is trading at around decade-lows against the dollar — could also help boost growth by making exports cheaper and push prices up by making imports more expensive.

In a separate encouraging development, unemployment across the eurozone fell to 11.2 per cent in January, its lowest level since April 2012. Compared with December 2014, the number out of work fell by 140,000 to 18.06 million.

The headline figures mask huge divergences across the region. Germany has the lowest unemployment rate in the eurozone at 4.7 per cent. And despite recent falls, Greece has the highest at 25.8 per cent in November — the country's figures lag others'.

The fall in the overall rate isn't a cause for celebration — to put into context, it's nearly double the 5.7 per cent the U.S. had in January. It's going to take years of sustained economic expansion for the eurozone to get its unemployment rate down to U.S.-type levels. In the meantime, many countries will still be grappling with high debt.

The most Bill Adams, senior international economist for PNC Financial Services Group, could say about Monday's figures was that they were just "less awful."