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Eurozone inflation falls to 0.3% as deflation knocks

Eurozone inflation fell again in August to 0.3 percent, official EU data showed on Friday, bringing the threat of a deflationary spiral dangerously close.

BRUSSELS: Eurozone inflation fell to 0.3 per cent in August, raising the dangers of deflation and also pressure on the European Central Bank to open up the cash floodgates, data showed on Friday (Aug 29).

The latest fall takes the rate down from 0.4 per cent in July and from 1.3 per cent a year ago, and to far below the ECB's target of just under 2.0 per cent. The latest twist downwards, against a background of worryingly sluggish eurozone growth, was driven by falls in the prices of food and energy, the European Union's statistical arm Eurostat, which published the figure, said.

Eurostat also reported that the eurozone unemployment rate in July was steady at 11.5 per cent from the level in June. This means that the rate is running at the lowest level since September 2012, and marks a decline from 11.9 per cent in July last year.

But the rate is high, and exceptionally high in some countries such as Spain, Greece and Italy. It is also running at a new record high level in France, which has just been hit by a major political crisis over slow growth, high unemployment and the need for deep reforms.

In July, there were 18.4 million people unemployed in the 18-member countries of the eurozone. However, this was 725,000 fewer than in July last year, but the number of unemployed edged up in the month.

The figures, mainly the inflation data, increase evidence that the eurozone is flirting with deflation, a climate of falling prices which can cause businesses and consumers to delay purchases. That can further reduce demand and prices and push up unemployment, a spiral which central banks find extremely difficult to counter.

The ECB, which meets on Thursday, has already lowered interest rates to record low levels, even going as far as a negative rate. The bank, which has a main statutory duty to ensure price stability at just under its target of 2.0 per cent, is widely considered to be moving towards quantitative easing. That is a radical policy of buying securities on a big scale to inject cash into the economy in the hope that this will raise activity, push down the euro and therefore push up prices.

A member of the ECB's policy council, Ewald Nowotny, governor of the Austrian central bank, said late on Thursday that he was "worried" about the outlook for eurozone growth, and that recovery was slower than the ECB had expected. Low growth tends to cause inflation to fall, as does a high exchange rate.

RECOVERY RISK

At Berenberg bank in London, economist Christian Schulz outlined the mix of factors at work in the inflation data which was "likely to feed into more discussions in Frankfurt (ECB) about further policy easing."

"Core inflation actually increased slightly from 0.8 per cent to 0.9 per cent in August," he said. "Much more important than inflation rates now is the economic rough patch caused by the crisis in Eastern Ukraine." This raised the risk "that the Eurozone recovery may be interrupted for longer" holding down inflation for longer. "The ECB is likely to step up its response by December at the latest," he said.

Capital Economics analysts said the underlying inflation data was "very weak" and "should encourage the ECB to offer stronger hints of additional policy support to come after its meeting next week".

The unemployment data showed that the number of people unemployed had risen by 4,000 in the month, the first increase since September 2013 adding to signs that "the labour market recovery is already petering out".

They said that although the ECB was "unlikely to act at its meeting next week, it is likely to hint that quantitative easing is firmly on the table". 

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