Commenting on the impact of negative inflation figures published by Eurostat, Dawn Kendall, Senior Bond Strategist at Investec Wealth & Investment said:
“The negative print on Eurozone inflation was widely expected by the market and more importantly flagged by Mario Draghi before Christmas and was in line with market expectations. However, the more pressing question now is; what’s next?
“Since Christmas, we have seen a marked deterioration in the Euro versus other trading blocs and this will put further pressure on inflation data going forward. In large part, it will depend on the amount of pain the consumer can take from retailers passing on the currency impact of higher import costs.
“In addition, oil has fallen 30% since the beginning of December which is a short term dampener in inflation before the consumer boost can start to be realised. These factors are working against the European Central Bank’s (ECB’s) desire to kick start the economy by talking of and preparing for Quantitative Easing (QE). When and if QE starts, these opposing forces will impact the future direction of inflation. For the short term, deflation is the biggest fear. The ECB meets on 22nd January and the Greek election is on 25th January – Draghi must act if he wants to avoid deepening deflation fears in the short term.”