Eurozone inflation swings to a positive in January at 0.9%

Author: Jonathan Lopez

2021/02/23

LONDON (ICIS)--Inflation in the eurozone swung to a positive 0.9% in January, up from December’s -0.3%, statistical office Eurostat said on Tuesday.

Since August 2020, prices across the 19-country currency union had been in negative territory due to the downturn caused by the pandemic, especially the heavy falls in energy prices, imports of which the region is highly dependant.

While crude oil prices have regained some ground year to date, the increase in the eurozone’s inflation rate came from domestic economic sectors, said Eurostat.

This would bode well for a more sustained recovery in prices, given the high volatility of energy prices.

“In January, the highest contribution to the annual eurozone inflation rate came from services (0.65 percentage points, pp), followed by non-energy industrial goods (0.37 pp), food, alcohol and tobacco (0.30 pp),” said Eurostat.

Energy was in fact the only negative factor in the price index, with a -0.41 pp contribution.

The positive reading in the inflation rate for January will come as a respite for the European Central Bank (ECB), whose main mandate is to keep prices close to, but below, 2%.

DEFLATION FEARS RECEDE
Long periods of negative inflation (deflation) tend to affect investment and job creation, prolonging the downturn and can force a central bank to purchase assets (bonds) in private markets to prop up prices.

Like most central banks did after the financial crisis, the ECB has also been purchasing assets since 2014 – many of them, Treasury bonds issued by its country members – after the Greek sovereign debt crisis sparked a wider crisis within the eurozone.

Despite the reluctance of some of its members, the ECB became thus the lender of last resort to the economy, a role central banks end up playing in a downturn.

Far from winding down the programme, considered a key step in recovery some economic normality. the ECB expanded it in 2020 after the pandemic’s negative effects in the economy became apparent.

Because the eurozone includes countries like Germany and France, among others, whose creditworthiness is considered very healthy, other members in the eurozone have been able to issue debt at low interest.

In the wider EU of 27 countries – those not in the eurozone keep their central banks and currencies – inflation stood in January at 1.2%, up from 0.3% in December.

In chemicals, producers managed during 2020 to keep their selling prices higher than the average inflation, as manufacturing across the eurozone resisted the pandemic's second wave better than other more customer-facing sectors within services.

According to Eurostat's latest reading for chemicals producer prices, in December they stood at 0.9% in the eurozone, and 1% in the EU.

EU inflation rates - January 2021
Source: Eurostat