Denmark suffers deflation shock first time in 60 years

[OSLO] Denmark, struggling to defend its currency peg against speculators, became the latest European nation to experience deflation as consumer prices fell on an annual basis for the first time since 1954.

Prices dropped 0.1 per cent in January from a year earlier, the Danish Statistics office said on Tuesday. Prices declined 0.5 per cent in the month, dragged down by falling transport and clothing costs.

Though the central bank's mandate to defend the krone's peg to the euro means it can't target inflation, efforts to fight capital inflows may provide the stimulus needed to fan prices. Governor Lars Rohde has cut the benchmark deposit rate four times in less than three weeks, bringing it down to minus 0.75 per cent to deter speculators. For consumers, the price development is far from dire, according to Nordea Bank AB.

"It's worth underscoring that in the current situation it's good news for the Danish economy," said Jan Stoerup Nielsen, a senior analyst at Nordea in Copenhagen. "As long as the falling inflation is due to declining energy prices and lower fees, it will contribute to supporting purchasing power." The central bank defends the krone's peg against the euro in an official 2.25 per cent tolerance band. In practice, it never lets the currency swing more than 0.5 per cent around the target. Pressure on the krone has risen as the European Central Bank embarks on an unprecedented quantitative easing program to defeat deflation in its own economy and after the Swiss National Bank abandoned its ties to the euro last month.

BLOOMBERG