As European Central Bank (ECB) policy makers gather today fortheir first meeting of 2015, the backdrop is a 0.2 percent annualdrop in consumer prices, the first in more than five years. ForPresident Mario Draghi, who wants to open the money tap, the data may push the central bank closerto the unprecedented step of buying government bonds to revivegrowth and inflation.

ECB officials are working on a plan to purchase sovereign debtas they strive to prevent a deflationary spiral of falling pricesand households postponing spending, a risk Draghi has said can't be“entirely excluded.” In addition to moribund growth, the regionrisks being further unsettled by elections in at least threecountries this year and mounting concern about the future of the single currency.

“Hello, deflation,” said Holger Schmieding, chief economist atBerenberg Bank in London. “Even if we do not share the widespreadconcerns about dangerous deflationary dynamics,” the ECB is “milesaway” from its goal of inflation near 2 percent, he said.

Economists in a Bloomberg survey had forecast the rate to fallto minus 0.1 percent.

The euro fell for a fourth day against the dollar and was down0.5 percent at $1.1827 as of 12:03 p.m. London time. It earlierdeclined to $1.1819, the lowest in nine years.

A separate report showed unemployment remained at 11.5 percentin November. Joblessness in Italy rose to a record 13.4 percent.German unemployment, calculated under a national measure, fell to6.5 percent in December, the lowest in more than two decades.

The last time the euro area's inflation rate went negative, in2009, the economy was struggling to recover from the recession thatfollowed the collapse of Lehman Brothers Holdings Inc. This time,the decline was partly driven by sluggish growth and a drop incrude oil prices of about 50 percent in the past year.

Energy prices fell 6.3 percent in December from a year earlier,according to today's report. Core Eurozone inflation, which stripsout volatile items such as energy, food, tobacco, and alcohol,increased to 0.8 percent year-on-year in December.

ECB officials have taken different approaches in analyzing theimpact of plunging oil prices on the economy. While Draghi haswarned of a dis-anchoring of inflation expectations and signaledsupport for quantitative easing (QE), Bundesbank President JensWeidmann favors not acting at this time, arguing that the dropcould be a “mini-stimulus package.”

'Extremely Fragile'

ECB Chief Economist Peter Praet told Germany's Boersen-Zeitunglast month that in an environment in which inflation expectationsare “extremely fragile,” officials cannot “simply look through” theslide in energy costs. Praet makes a recommendation at the start ofeach monetary-policy meeting.

Central bank staff have worked on QE proposals in the past twomonths, and Dutch newspaper Het Financieele Dagblad reportedyesterday that governors may be offered three different options tochoose from at their Jan. 22 meeting.

“According to the ECB's own logic, with sub-zero inflation, nosign of a material pickup on the horizon, and inflationexpectations de-anchoring, there is a compelling case for furthermonetary easing,” said Teunis Brosens, an economist at ING Groep NVin Amsterdam. “The question no longer seems 'if' the ECB is goingto announce QE, but 'how' it will be tailored.”

Since June, the ECB has cut interest rates twice, offered cheaplong-term loans to banks to jumpstart lending, and started apurchase program for asset-backed securities—a decision Weidmannand German Executive Board member Sabine Lautenschlaegeropposed.

“If you look at past experience, we've taken majormonetary-policy decisions in a situation where there was nounanimity,” Draghi said after the ECB's Dec. 4 meeting. “So this iswhat we have to keep in mind.”

–With assistance from Catherine Bosley in Zurich and KristianSiedenburg in Vienna.

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