We’ve just seen the weakest year for inflation since the euro’s birth

Now that all the eurozone inflation numbers are in for 2015 we can see that it’s been a truly extraordinary year.

The eurozone’s December’s consumer price index rise of 0.2% left the average rate for the year as a whole at zero – the weakest year since the single currency’s birth in 1999. The past year’s figures take annual inflation below even the nadir of the financial crisis and, as the chart below shows, efforts to stimulate prices in the wake of that debacle petered out quickly. This is the sort of stubborn low inflation which is sure to invite uncomfortable comparisons with Japan’s long fight to bring some pricing power back to its economy.

Indeed, the forecaster Capital Economics finds it hard to see at this point where a sustained increase in inflation is going to come from. Its analysts concede that the headline rate is likely to rise, especially if oil prices recover. However, core inflation is set to remain subdued by any measure given weak cost pressures, little sign of wage inflation and “plentiful spare capacity in the economy,” they write.

And some base effects from weak oil are hardly the stuff of durable recovery.

Headline inflation has now been below 1% since October 2013 and, despite continued signs of recovery in the eurozone, domestically generated inflation is also proving sluggish. December services inflation was 1.1%, whereas in the pre-crisis days a print below 2% was unusual.

Market-based measures of medium-term inflation expectations remain adrift: a swap contract that estimates five-year inflation in five years’ time stands at 1.67%. Such measures are heavily influenced by moves in inflation now, which could be read as a lack of faith among investors in the European Central Bank’s ability to achieve its aim, which is supposedly inflation of near but not over 2%.

The ECB failed to match the markets’ exaggerated hopes of policy easing in December, but a few more months of inflation this docile are sure to see investors begging for more. Thursday’s account of that famously underwhelming policy meeting is going to be hotly awaited to see how close the ECB might have come to action back then.

Source: Capital Economics

This post is republished from news.markets: http://news.markets/bonds/weve-just-seen-weakest-year-inflation-since-euros-birth-7762/