Eurozone inflation drops back further in December

[January 17, 2012]  BRUSSELS (AP) -- Inflation in the 17 countries that use the euro eased by more than expected during December, official figures showed Tuesday in a welcome development for a currency union struggling in the face of a raging debt crisis.

Eurostat, the EU's statistics office, said inflation in the eurozone fell to 2.7 percent in the year to December from the previous month's 3 percent largely on the back of lower energy prices. The fall was bigger than the initial estimate of 2.8 percent.

Though inflation has been running above the European Central Bank's target of just below 2 percent, the bank cut interest rates in both November and December, taking the benchmark rate back to the joint record low of 1 percent.

The bank expects inflation to drop back further in the coming months as high unemployment keeps a lid on wage demands and last year's spike in energy and commodity prices drop out of the annual comparison.

Further cuts in the main euro interest rate, the refi rate, are widely predicted over the coming months as the eurozone economy appears to be heading back into recession in the face of a debt crisis that's dented economic confidence.

"We believe that, with the ECB feeling (relatively) at ease about inflation prospects over the medium term, it will cut the rate down to 0.50 percent," said Gustavo Bagattini, European economist at RBC Capital Markets.

[Associated Press]

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