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Europe Economy
Eurozone Consumer Confidence Boosted by Oil Price
From the Wall Street Journal of Mon, 22 Dec 2014 10:12:30 EST
The European Commission said Monday its preliminary measure of consumer confidence rose to minus 10.9 in December from minus 11.5 in November.
The European Commission said Monday its preliminary measure of consumer confidence rose to minus 10.9 in December from minus 11.5 in November. Getty Images

Consumers in the 18 countries that share the euro became slightly more upbeat in December, likely reflecting the boost to real incomes from falling oil prices.

The pickup in confidence indicates that household spending may increase slightly in coming months, a development that would help the eurozone economy avoid a slide back into contraction despite weak business investment and disappointing export sales.

The European Commission on Monday said its preliminary measure of consumer confidence rose to minus 10.9 in December from minus 11.5 in November. The consensus forecast of 15 economists surveyed by The Wall Street Journal last week was for a rise to minus 11.0.

Economists often compare falling oil prices to declining income or sales tax rates, since they leave households with more money to spend on other goods and services. The recent sharper fall in oil prices is likely to have made many eurozone households feel better about their near-term financial positions.

Indeed, consumer spending has edged higher in the eurozone as the inflation rate has fallen over recent quarters, expanding by 0.5% in the third quarter, having increased by 0.3% in the second and 0.2% in the first.

When inflation rates were higher, policy makers would likely have ignored falling oil prices, expecting the boost to real household spending power to compensate over the medium term, as prices of other goods and services rose.

But right now, falling oil prices mean the eurozone’s annual rate of inflation is likely to turn to negative in coming months, as consumer prices dip below the levels recorded in late 2013 and early 2014.

Very low levels of inflation can be harmful to economic growth, crimping company profits and investment, while making it more difficult for governments and households to reduce high levels of debt.

And a slide into deflation—or a period of falling prices—would exacerbate those problems. Policy makers worry that if consumer prices start to fall, businesses and households will start to postpone spending decisions in the expectation that goods will be cheaper in the future. That in turn can become a self-perpetuating downward spiral, and the case of Japan has shown how difficult it can be to revive growth after deflation has taken hold.

The European Central Bank has said it would reassess its existing stimulus policies, which include cheap bank loans and purchases of asset-backed securities and covered bonds, in early 2015, and decide whether to do more to ensure that annual inflation moves closer to its target of just below 2%.

Write to Paul Hannon at paul.hannon@wsj.com



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