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September 22, 2017

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Eurozone inflation fall to 0.8%, stoking concerns for growth

BRUSSELS -- Eurozone inflation fell to 0.8 percent in December from 0.9 percent in November, data showed on Tuesday, stoking fresh concerns over the risk of falling prices which could endanger growth prospects.

In December 2012, inflation in the then 17-member eurozone ran at 2.2 percent but it fell steadily, hitting a four-year low of 0.7 percent in October before picking up slightly in November.

The November report came as a relief after a series of reports suggested a modest eurozone recovery was in trouble and then figures last month suggested the economy had indeed got through its soft spot.

However, analysts said that Tuesday's report was fresh cause for concern, with core inflation — which excludes food, alcoholic drinks and tobacco — at a record low 0.7 percent in December, down from 0.9 percent.

December's headline fall "will add to concerns that the region could suffer from a bout of deflation," said Ben May at Capital Economics.

But it is the breakdown which "painted a more worrying picture," May said, with the decline "entirely down to a drop in core inflation."

Continued weak industrial producer prices — down 0.1 percent in November after a fall of 0.5 percent in October — added to the negatives, he noted.

In total, the latest figures suggest inflation will remain "significantly below" the European Central Bank's 2.0-percent target "for rather longer" than it expects," May said.

The ECB cut its benchmark interest rate by half to a record low 0.25 percent in November in a surprise move after a slew of data showing the eurozone economy slowing sharply.

After escaping a record 18-month recession in the second quarter with growth of 0.3 percent, the 17-nation eurozone eked out a gain of just 0.1 percent in the third.

Tough government austerity policies to combat the debt crisis have sucked demand out of the economy.

This has driven fears of deflation — falling prices in real terms — which can encourage consumers to put off buying goods in the expectation that if they wait, they will become cheaper.

That in turn weakens the economy as companies reduce output accordingly, hitting employment and demand, thereby setting off a downward spiral.

Howard Archer at IHS Global Insight said the December report "is particularly unwelcome news for the ECB as it takes inflation back down to the level where the bank felt compelled to cut interest rates ... in November."

"While the ECB remains adamant that deflation ... is not a serious risk, it will undoubtedly be uncomfortable with this latest dip," Archer said.

"The ECB would certainly like to see inflation back above 1.0 percent sooner rather than later," he said, highlighting like May, the fall in core inflation.

Archer said recent data on industrial and business activity may have eased some of the immediate pressure on the ECB but it will likely have to eventually take further action.

The Eurostat statistics agency said the largest gains in December prices were seen in food, alcoholic drinks and tobacco which rose 1.8 percent after an increase of 1.6 percent in November.

Energy prices were flat after falling 1.1 percent in November while services were up 1.0 percent compared with 1.4 percent.

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