Eurozone Edges Nearer to Deflation

The inflation rate in the eurozone, which last month was recorded at just 0.5%, eased again to 0.4% in July and further into what the European Central Bank (ECB) has described as a ‘danger zone’. The July figure was the lowest recorded by the region since October 2009.

The latest data, issued by the European Union’s (EU) statistical office, Eurostat, show that the rate continues to be well below the ECB’s target rate of 2%. Eurozone prices have risen at an annualised rate of less than 1% for the past 10 months.

The ECB’s governor, Mario Draghi believes that an inflation rate of below 1% for the region creates the risk of deflation. Some of its member countries that have struggled to emerge from recession, such as Spain, Greece and Portugal, have already recorded inflation below zero.

“Today’s figures don’t give any assurance that the eurozone is already out of the deflation danger zone,” wrote Peter Vanden Houte, an economist at ING Bank in Brussels, in a note to clients. “Moreover, with the escalating conflict with Russia dampening growth prospects, it seems unlikely that deflation fears will disappear any time soon.”

Analysts suggest that the figures narrow the odds that the ECB will follow the lead of the US Federal Reserve and the Bank of England by embarking on a full scale programme of quantitative easing (QE), buying financial assets such as government debt with newly created money, in a bid to nudge inflation higher.

The ECB has already introduced measures to boost growth and tackle the threat of deflation. In early June it cut interest rates, including reducing the bank deposit rate to below zero, and made available cheap long term loans to banks. It also pledged further action if inflation continued to fall.

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