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German inflation slowed to its lowest level in over five years in December, raising pressure on European Central Bank President Mario Draghi to unveil unconventional measures later this month to ward off a deflationary spiral in the Euro zone.
Preliminary data showed on Monday that annual inflation, harmonised for comparison with other European countries, fell to just 0.1 per cent from 0.5 per cent in November. Non-harmonised data showed consumer prices increasing 0.2 per cent year-on-year in December, down from 0.6 percent in the previous month.
Both readings were below the expectations of economists polled by Reuters and represented the lowest readings since October 2009.
The slowdown, which was driven by a fall in energy prices, reinforced expectations that the ECB will decide at a meeting later this month to buy the debt of Euro zone governments, aiming to push inflation back up towards its target of just below two per cent.
"It is very possible that the inflation rate in the Euro zone will turn negative," said Holger Sandte, an economist at Nordea Bank. "That increases the likelihood that the ECB will announce a bond-buying programme on January 22." Inflation data for the entire 19-nation euro zone is due on Wednesday.
The evidence of slowing German inflation came days after Draghi gave an extensive interview to German daily Handelsblatt in which he warned that the downside risks to price stability had risen over the past half year.
He also confirmed that the ECB stood ready to introduce new measures if necessary in early 2015. Speculation is rife that Draghi could unveil plans for mass purchases of Euro zone government bonds - a step known as quantitative easing (QE) - to tackle the threat of deflation.
The inflation data could give him additional ammunition to convince wavering members of the ECB's Governing Council to back QE, though Bundesbank President Jens Weidmann has signalled that he will oppose such a step.
Jennifer McKeown at Capital Economics, said that if prices in the Euro zone fell in December, the pressure for QE would become "irresistible".
The big question for the markets is how the ECB might structure a QE programme - for example whether Greek bonds will be included given uncertainty over the outcome of an election being held on Jan. 25, three days after the next ECB meeting.
The far-left Syriza party, which has vowed to reverse the austerity measures that were a condition for Greek bailout packages totalling 240 billion euros, holds a narrow lead in opinion polls.
