Deflationary pressures still building

Recent euro-zone inflation data have provided firmer signs that CPI inflation will remain well below the ECB’s 2% stability ceiling for longer than the Bank itself expects. Admittedly, headline CPI inflation, which fell to 0.8% in December, is still above the 2009 low of -0.6%. But core inflation, which excludes food and energy prices, is now at a record low of 0.7%, suggesting that underlying inflationary pressures may now be weaker than four or five years ago. Given the huge amount of spare economic capacity, we expect core inflation to continue to trend downwards. Indeed, the risk of a period of outright deflation is growing.