The eurozone has officially entered deflation, with tumbling oil costs tipping the currency towards its latest crisis.
Eurostat, the EU’s statistics agency, said prices in what was then the 18-country euro area were 0.2% lower in December than the previous year.
It was the first time inflation had entered negative territory in the zone since the height of the financial crisis.
The main reason behind the slide from the 0.3% inflation rate recorded in November was the plunging oil price, which is being passed on to motorists at the fuel pumps.
The Eurostat figures suggested that if energy costs were stripped out, eurozone inflation would be running at 0.6%.
The decline in the headline rate was bigger than anticipated and likely to cement expectations that the European Central Bank (ECB) will soon implement a more aggressive monetary stimulus to boost economic activity.
ECB president Mario Draghi is tipped to kick-start a programme of quantitative easing later this month, though the snap general election in Greece may force him to delay.
Greek 10-year bond yields – the cost to its government of servicing debts – climbed above 10% for the first time since September 2013 in the wake of the negative inflation announcement on growing fears the country will be leaving the eurozone.
The main problem with deflation is the fact that consumers and firms hold off making purchases believing prices will be cheaper at a later date, damaging output, jobs and therefore sowing the seeds of recession.
Deflation dogged the Japanese economy for decades and economists say it remains the biggest threat to recovery in the euro area which is the UK’s biggest trading partner.
Head of research of the economic think-tank the Adam Smith Institute, Ben Southwood, said: “Eurozone deflation needs to be stopped as soon as possible to forestall a return to the darkest days of the crisis.
“The ECB must act now – easing monetary policy by buying bonds – or, even better, changing their whole regime and targeting the price level, or even nominal GDP, instead of inflation.