Eurozone inflation falls to 2% in January

Inflation across the Eurozone has fallen from 2.2% to 2% in January, according to official figures. The European Commission further estimates that inflation in the Eurozone will fall to 1.8% this year, in line with its target of “close to, but below 2%”.   In comparison, the inflation rate for the European Union’s 27 member states, including those countries that do not use the euro, was 2.1%, down from 2.3% in December. 

What has been the catalyst for the inflation reduction?  The decline comes as austerity measures and weakened economies leave potential buyers with little extra cash to spend, in return limiting retailers’ ability to hike up prices.

The lowest inflation rate was registered in Greece, Portugal and Latvia, at 0%, 0.4% and 0.6% respectively in January. On the other upper hand, the biggest inflation rate of 5.1% was recorded in Romania, with Estonia and the Netherlands at 3.7% and 3.2%.

Which sectors of the economy were the biggest movers contributing to the inflation figure?  Both the EU and the Eurozone as a whole recorded a reduction in consumer prices in January, of 1% and 0.8%, respectively. A total of 17 EU states registered deflation and two more had consumer prices at flat levels in January.

The most significant upward impact on the 17 country bloc annual inflation results in January came from electricity (+0.16%), vegetables (+0.09%) and tobacco (+0.07%).  These were counterbalanced by telecommunications (-0.20%), medical and paramedical services (-0.08%) and garments (-0.06%) which according to the Eurostat showed the biggest downward impacts.

What to expect next?  Some analysts think the drop could leave the European Central Bank (ECB) room to cut interest rates at its next meeting.  Rates are currently at 0.75%. Mario Draghi, the ECB President, has stated that the lower inflation figure allowed the bank to remain accommodating. If Eurozone growth continues to decline, the ECB might step in further to stimulate the economy.

So why should you pay attention to the inflation rate?  Inflation is eroding the value of pensions over time.  Anyone who buys a fixed annuity providing a regular income for life could see the value of their pension erode significantly over time.  The longer the pensioners would live, the poorer they would become, as the real value of their fixed pensions gets reduced by rising inflation.

What to do?  When picking an annuity it is possible to opt for one that’s index–linked, either to inflation or a set percentage to protect your money from inflation.  Ask one of our financial advisors how!

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