Inflation keeps falling in Eurozone

Press conference by Olli Rehn, Vice-President of the EC, on the winter economic forecasts for 2013-2014. (EC Audiovisual Services).

Press conference by Olli Rehn, Vice-President of the EC, on the winter economic forecasts for 2013-2014. (EC Audiovisual Services).

The downwards trend of Eurozone’s inflation rate is an infallible witness of the strong competitive base of home production on both fronts, that is manufacturing production and services. According to Eurostat, the EU statistical service, “The euro area annual inflation rate was 2.0 % in January 2013, down from 2.2 % in December 2012. A year earlier the rate was 2.7 %”. Eurostat estimates also that the Euro area annual inflation is expected to have been formulated at 1.8 % in February 2013.

In this way data confirmed the flash estimate for January, published on 1 February 2013. Eurostat findings confirm that energy is still the main item responsible for the strongest inflationary pressures. According to the same source, “’Energy’ (3.9 % compared with 5.2 % in November) had the highest annual rate in December, followed by ‘Food, alcohol & tobacco’ (3.2 %, stable compared to December), ‘Services’ (1.6 % down from 1.8 % in December) and ‘Non-energy industrial goods’ (0.8 % compared with 1.0 % in December)”.

Inflation components

Eurostat’s consumer price indices are based on data describing the distribution of households’ available income. In this respect the most important item of consumer spending is ‘services’. Consequently the services price indices weight more on the overall inflation index.  Eurostat explains that, “Each of the main components contributes in varying degree to the headline inflation in the euro area. In terms of weight…services is the largest component, accounting for around 42.3 % of individual consumption expenditure in the euro area. It is followed by non-energy industrial goods with around 27.4 %. Food, alcohol & tobacco and energy account for 19 % and 11 %, respectively”.

In this paragraph above, one can find the way European consumers spend their available income. Services and manufactured goods absorb almost 70% of consumes’ income, leaving the energy goods at the last position of the list. The truth is however that energy prices influence greatly the production cost of all the sectors of the economy. That is why energy is so important an item, in respect with the evolution of the overall consumer price index.

In any case inflation is obviously not a problem for Eurozone, not now nor will it be in the medium run. As observed above, low inflation pressures are a very solid indication of a strong and competitive production base, both in the huge Eurozone services sector and in manufacturing. As a result the euro area economy is bound to continue performing well on international markets, accumulating positive balances on foreign trade in both, services and goods. If it was not for the problem of refinancing the Italian sovereign debt, Eurozone would have had only clear skies ahead it.

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