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Euro-area inflation stuck close to zero may add pressure on ECB

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Euro-area inflation was weaker than economists predicted in December, when the European Central Bank stepped up its stimulus program.

[ZURICH] Euro-area inflation was weaker than economists predicted in December, when the European Central Bank stepped up its stimulus program.

Consumer prices rose an annual 0.2 per cent, the European Union's statistics office said on Tuesday. That compares with a median estimate for a 0.3 per cent increase, which would have been the strongest reading in seven months, according to a Bloomberg survey of economists.

Even though ECB officials have for months been trying to boost price pressure with unconventional policies such as negative interest rates and large-scale asset purchases, their medium-term inflation goal of just under 2 per cent is moving further into the distance. What was billed as a slight gain in the headline rate due to mechanical 'base effects' at the turn of the year may prove to be much smaller than anticipated due to a renewed drop in crude-oil costs.

Brent crude ended 2015 with the lowest annual average price in 11 years as the largest members of the Organisation of Petroleum Exporting Countries keep pumping near record levels. At US$37 a barrel, oil is much cheaper than the ECB anticipated in December, when it predicted inflation would average 1 per cent this year and 1.6 per cent in 2017.

On Monday, the German statistics office said inflation in Europe's largest economy was 0.3 per cent, missing economist estimates for an increase to 0.4 per cent.

"While implications for the medium-term outlook may take time for the Governing Council to assess in view of recent easing, the latest inflation data offer no respite and will keep the Council under pressure to do more in the first half of this year," Nick Matthews, head of European economic research at Nomura International in London, said prior to the report.

ECB policy makers in Frankfurt expanded stimulus late last year by cutting the deposit rate to minus 0.3 per cent and extending the duration of large-scale asset purchases. While President Mario Draghi said in a speech in New York that he will secure a return of inflation to 2 per cent "without undue delay," he conceded that an addition to the now 1.5 trillion-euro (S$2.28 trillion) quantitative-easing program could still be needed.

Core inflation, which strips out items with volatile prices such as fuel, remained at 0.9 per cent in December, Eurostat said. Energy costs decreased an annual 5.9 per cent.

BLOOMBERG