The annual change in Eurozone consumer prices dropped to -0.2% in December from 0.3% in November, with the negative reading reflecting falls in energy and unprocessed food prices. Excluding these categories, prices rose by an annual 0.7%, unchanged from November. A narrower “core” inflation measure excluding energy, food, alcohol and tobacco firmed to 0.8%, above its level at end-2013 – see first chart.

Core inflation is unacceptably weak but the ECB has already reacted, cutting official rates in June and September, offering cheap long-term funding for bank lending and embarking on QE focused on private-sector securities. Monetary policy affects the economy with a six to 12 month lag and inflation after about two years. Monetary trends provide early evidence about its effectiveness. Six-month growth in Eurozone narrow money M1 rose from 4.1% annualised in May, before the ECB’s first rate cut, to 9.9% in November. Broad money M3 growth increased from 1.0% to 5.3% over the same period. The euro’s effective exchange rate, meanwhile, has fallen by 4% since mid-2014.

The economic definition of “deflation” is a pervasive and persistent decline in prices associated with sustained money and credit weakness. The Eurozone isn’t in deflation currently and the risk of it entering such a scenario has diminished.

German releases today were encouraging, with the level of unemployment falling to a 23-year low in December, unfilled vacancies at a new record and retail sales volume rising by a solid 1.0% in November (although monthly changes are notoriously volatile). The German economy is effectively at full employment: the unemployment rate stood at 5.0% in November versus 5.8% in the US and 6.0% in the UK in the three months to October – second chart.