German inflation sinks to five-year low

The inflation rate in Germany fell to its lowest level since 2009, preliminary data showed Monday, highlighting the effect the falling price of oil has had on consumer prices in Europe's largest economy.

In a flash estimate based on data from six key states, Germany's federal statistics office, Destatis, calculated that the inflation rate had slowed to a less-than-forecast 0.2 percent in December, from 0.6 percent one month prior. The last time inflation in Germany fell below 0.2 percent was in October 2009, when it was zero.

Destatis cited sinking energy costs as the main reason for the low rate. The price per barrel of crude oil has fallen by nearly 50 percent since mid-2014.

The overall inflation rate in 2014 was 0.9 percent, well below a goal of just below 2 percent that the European Central Bank says is necessary for healthy economic growth.

Inflation in the eurozone as a whole has also hovered at stubbornly low levels, spurring the ECB to cut interest rates to all-time lows in hopes of enticing consumers and corporations to increase their total volume of borrowing - and hence to increase their spending.

Why economists fear deflation

Economists and central banks fear deflation more than inflation because they worry that consumers and businesses could decide to put off spending in the hopes that prices fall further.

This, however, can have devastating macroeconomic effects. If a lot of people delay purchases, the result is a self-reinforcing reduction in the rate of economic activity.

Secondly, in an economy in which many consumers and governments are deeply in debt, deflation means that the de facto debt burden increases: if a thousand euros is worth more than it was a week ago, and a debt holder owes a thousand euros, that person's real debt load has increased.

cjc/nz (AFP, dpa)