Deflation in the eurozone as prices fall 0.2% in December

JANUARY 7, 2015

Inflation in the eurozone has turned negative, official figures have shown, with prices in December 0.2% lower than the same month a year earlier, reports the BBC.

It said that the tip into deflation is expected to make further action to stimulate the zone's economy by the European Central Bank more likely.

The bank's inflation target is below but close to 2%.

The fall in prices was driven mainly by lower energy costs following the recent drop in the price of oil.

If energy prices are excluded, December's inflation rate for the eurozone was 0.6%, the same as in November.

***In economics, deflation is a decrease in the general price level of goods and services.

Is it good or bad 

Falling prices sounds like a pretty good thing, doesn't it? In some circumstances, that might be the case, and there is a view that moderately falling prices can be beneficial.

But deflation can sometimes be troublesome. Modern central banks generally regard it as something to be avoided.

One reason is the effect on debtors. Prices and perhaps incomes may fall, but debts do not. If you are a business with falling revenue, or a household with a declining income, debt payments become more of a burden.

Governments can be caught in the same trap, because if prices and incomes fall, so does tax revenue.