Eurozone, Including Germany, in Deflation; Strange Times for Denmark, Deutschland and EU

Eurostat released HICP Harmonized Index of Consumer Prices statistics today.

In spite of promising that deflation would not hit again, here we are, and for the second month too.

Euro area annual inflation is expected to be -0.6% in January 2015, down from -0.2% in December 2014 according to a flash estimate from Eurostat, the statistical office of the European Union. This negative rate for euro area annual inflation in January is driven by the fall in energy prices (-8.9%, compared with -6.3% in December). Prices are also expected to fall for food, alcohol & tobacco (-0.1%, compared with 0.0% in December) and non-energy industrial goods (-0.1%, compared with 0.0% in December). Only prices for services are expected to increase (1.0%, compared with 1.2% in December).

New official figures from Germany show that prices have fallen, by 0.5%, over the previous 12 months.

Meanwhile the Danish Central Bank has cut one of its main interest rates for the second time in a week.

It is a rate paid to commercial banks for excess funds parked at the central bank. It was already below zero. Now it is even lower - minus 0.5%.

It means banks have to pay to leave money at the central bank, above certain specified limits.

Negative interest rates are another example of the strange financial world that has emerged in the aftermath of the financial crisis.

What is the connection between falling prices - or deflation - in Germany and the Danish central bank? It is about Denmark's 35-year policy of tying its currency, the krone, to the euro, and before that to the German mark.

That peg has come under increasing strain as the European Central Bank, the ECB, has taken steps to combat deflation.