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ECB survey says trough reached in eurozone inflation

Eurozone inflation has "more or less" reached a trough and will start moving higher again in the next few years, a survey by the European Central Bank forecast on Thursday (Aug 14).

FRANKFURT: Eurozone inflation has "more or less" reached a trough and will start moving higher again in the next few years, a survey by the European Central Bank forecast on Thursday (Aug 14). There is widespread concern that the single currency area could be on the brink of deflation, but the ECB's regular quarterly survey of professional forecasters suggested such fears are unwarranted.

Inflation in the 18-country eurozone slowed to a meagre 0.4 per cent in July, the lowest level since late 2009 and way off the ECB's target of just under 2.0 per cent.

Declining inflation is a concern because it carries the risk of outright falling prices, known as deflation, which deters consumers from spending in the belief they can wait and buy more cheaply later. If that happens, demand suffers and companies put off investment, hurting employment and so setting off a vicious circle which can drag down the whole economy.

But its latest survey, the ECB found that "a number of respondents argued that the trough of inflation has more or less been reached". The forecasters expect inflation "to be on an upward sloping path over the next few years as a result of the recovery in real economic activity and an unwinding of the downward impact of previous oil, food and exchange rate developments," the ECB wrote.

"In addition, stable inflation expectations and wage growth, although moderate, are considered to provide a floor to inflation." In concrete terms, the forecasters predicted that area-wide inflation will reach an annual average 0.7 per cent this year and then pick up to 1.2 per cent in 2015 and 1.5 per cent in 2016, the ECB said.

The new forecasts mark a downward revision from previous predictions. At the time of its last SPF survey in May, forecasters had been pencilling in inflation of 0.9 per cent for this year and 1.3 per cent next year.

Over the longer term, the rate of inflation could reach 1.9 per cent, the survey found. The SPF survey usually provides an indication of where the ECB's own forecasts - scheduled for release in September - are headed.

Turning to the growth outlook, the SPF survey predicted that area-wide gross domestic product (GDP) would return to growth of 1.0 per cent in 2014 and 1.5 per cent in 2015 after contracting last year. Momentum would pick up to growth of 1.7 per cent in 2016 and 1.8 per cent in the longer term, the ECB survey found.

The new prognoses largely confirm previous forecasts and "imply a gradual strengthening of economic activity in the years ahead," the ECB wrote. Second-quarter GDP data suggest, however, that recovery in the single currency area may have stalled in the period from April to June.

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