Greece’s severe recession dragged consumer prices down again in November, marking the deepest deflation on record and potentially hurting the country’s struggle to control its debt.

Consumer prices fell 2.9 per cent on an annual basis last month from a drop of 2.0 per cent the previous month, statistics service ELSTAT said today. A mix of record unemployment, wage cuts and ample spare capacity in the economy pulled prices down.

Such falls prices have not been unwelcome in Greece to date. They have been seen - particularly by the European Union and the International Monetary Fund, which have bailed out Greece twice - as a way to make companies more competitive abroad and protect consumers whose incomes have been sharply squeezed. But the OECD warned last month that a faster-than-expected fall in prices could hurt economic growth, increase Greece's debt-to-GDP ratio and upset the macroeconomic projections underpinning its €240 billion bailout.

Greek deflation is already running faster than analysts estimated. The 2.9 per cent contraction was bigger than an analyst forecast in a Reuters poll of -1.7 per cent. By contrast, the inflation rate in the 17 countries sharing the euro accelerated in November to 0.9 per cent from 0.7 per cent the previous month.

“This is unprecedented for Greece,” Nikos Magginas, an economist at National Bank of Greece said. “A protracted period of general price falls would deteriorate the country’s debt dynamics”, he added.

ELSTAT confirmed separately that the country’s recession, while still harsh, eased between July and September for a fourth consecutive quarter, shrinking by 3.0 per cent year-on-year. The reading was unchanged from a previous flash estimate published last month.

Greece and its international lenders project the economy will shrink 4.0 per cent in 2013 in what they expect to be the end of the country’s austerity-fuelled six-year recession, which shaved off about a quarter of the economy.

But expected recovery next year is clouded by rising friction between Greece and its lenders in their latest, ongoing round of bailout talks. Greek officials expressed anger today over an announcement by the country’s lenders over the weekend that talks over the latest round of bailout payments, which started in September, will likely drag into to January.

“This is blackmail,” deputy parliament speaker Yannis Tragakis from the co-ruling conservative New Democracy party told Skai TV today.

The troika of international lenders - IMF, European Commission and European Central Bank - is pushing Athens to find further savings to make sure it will meet its 2014 budget surplus targets. It also wants Athens to lift a temporary ban on first home foreclosures and ease restrictions on mass-layoffs in the corporate sector.

But the Greek government is asking lenders to cut their demands after it is set to achieve in 2013 its first primary budget surplus, before interest payments, in years. (Reuters)