Azernews.Az

By Bloomberg

Euro-area households are already reaping the benefits of cheaper oil, though probably too late to stop the European Central Bank adding more stimulus.

As the CHART OF THE DAY shows, a drop in the inflation rate for energy below zero has coincided with a pick-up in household spending across the currency bloc. Prices for food and drink have also slowed as transport costs ease, boosting disposable incomes for discretionary spending.

Bundesbank President Jens Weidmann has said the slumping price of crude will act as a mini stimulus for the region’s flagging economy, reducing the need for more action by the ECB. Even so, his colleagues at the central bank have countered that the drop risks undermining broader inflation expectations and sparking a deflationary spiral.

“It’s the paradox of the current situation,” said Frederik Ducrozet, a Paris-based economist at Credit Agricole. “Normally you would be happy with a supply-side shock from oil prices that boosts demand and disposable income. But the ECB has to worry when inflation is so low.”

Euro-area inflation was 0.3 percent in November, matching a five-year low and compared with a goal of just under 2 percent. ECB staff are preparing an expanded asset-purchase program, which would probably include government bonds, for consideration at the next monetary policy meeting on Jan. 22.

Brent crude prices have fallen by almost half this year amid a global glut of oil. The declines accelerated after the Organization of Petroleum Exporting Countries decided last month not to cut production to alleviate the oversupply.