Inflation in euro areaslows to two-year low

Bloomberg

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The inflation rate in the euro area fell to 1.6 percent from 2.1 percent in November, the European Union statistics office in Luxembourg said yesterday. The December rate was the lowest since October 2006 and matched the initial estimate published on Jan. 6.

European inflation will average 1.4 percent this year and 1.8 percent next year, the European Central Bank forecast last month. The central bank also predicted the economy would contract about 0.5 percent in 2009, which would be the first annual drop in gross domestic product since the euro’s introduction a decade ago.

As the eurozone contracts and energy costs decline amid falling demand, concerns about deflation are rising. The price of crude oil has fallen by 75 percent since reaching a record $147.27 a barrel in July. Energy prices fell 3.7 percent from a year earlier in December, the first annual decline since August 2007, the data shows.

European confidence plunged to the lowest on record last month. The German economy may have contracted as much as 2 percent in the fourth quarter, the country’s statistics office said. That would be the biggest slump in more than two decades.