Commentators continue to speculate that the Eurozone will enter a deflationary scenario in which household and business expectations of falling prices cause spending to be deferred. Such worries are not supported by EU Commission December consumer and business surveys.

The first chart shows annual CPI inflation and an expectations indicator* derived from the consumer survey. The indicator has been stable recently at close to its historical average. The current level is consistent with the ECB’s target of “inflation rates below, but close to, 2%”.

Price-raising plans in business surveys covering industry, construction, services and retailing are similarly normal and little changed from a year ago.

The consumer inflation expectations indicator remains positive even in Italy and Spain – second chart.

Annual CPI inflation slipped back to 0.8% in December, though remains above October’s 0.7%. A previous post argued that weakness reflects disastrously restrictive monetary policy in 2011, when the ECB hiked rates despite money supply stagnation. The policy reversal under President Draghi succeeded in reviving the key M1 measure in 2012-13, with economic activity now responding and inflation likely to follow later in 2014 – assuming no further exchange rate strength. Current monetary trends suggest that deflation risks are receding even in the periphery – see post last week.

*The indicator is the sum of the net percentages of consumers reporting higher prices over the last 12 months and expecting a faster increase over the coming 12 months.