As European Central Bank (ECB) policy makers gather today for their first meeting of 2015, the backdrop is a 0.2 percent annual drop in consumer prices, the first in more than five years. For President Mario Draghi, who wants to open the money tap, the data may push the central bank closer to the unprecedented step of buying government bonds to revive growth and inflation.

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

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

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

The euro fell for a fourth day against the dollar and was down 0.5 percent at $1.1827 as of 12:03 p.m. London time. It earlier declined to $1.1819, the lowest in nine years.

A separate report showed unemployment remained at 11.5 percent in November. Joblessness in Italy rose to a record 13.4 percent. German unemployment, calculated under a national measure, fell to 6.5 percent in December, the lowest in more than two decades.

The last time the euro area's inflation rate went negative, in 2009, the economy was struggling to recover from the recession that followed the collapse of Lehman Brothers Holdings Inc. This time, the decline was partly driven by sluggish growth and a drop in crude 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 strips out 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 the impact of plunging oil prices on the economy. While Draghi has warned of a dis-anchoring of inflation expectations and signaled support for quantitative easing (QE), Bundesbank President Jens Weidmann favors not acting at this time, arguing that the drop could be a “mini-stimulus package.”

'Extremely Fragile'

ECB Chief Economist Peter Praet told Germany's Boersen-Zeitung last month that in an environment in which inflation expectations are “extremely fragile,” officials cannot “simply look through” the slide in energy costs. Praet makes a recommendation at the start of each monetary-policy meeting.

Central bank staff have worked on QE proposals in the past two months, and Dutch newspaper Het Financieele Dagblad reported yesterday that governors may be offered three different options to choose from at their Jan. 22 meeting.

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

Since June, the ECB has cut interest rates twice, offered cheap long-term loans to banks to jumpstart lending, and started a purchase program for asset-backed securities—a decision Weidmann and German Executive Board member Sabine Lautenschlaeger opposed.

“If you look at past experience, we've taken major monetary-policy decisions in a situation where there was no unanimity,” Draghi said after the ECB's Dec. 4 meeting. “So this is what we have to keep in mind.”

–With assistance from Catherine Bosley in Zurich and Kristian Siedenburg in Vienna.

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