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Categorized | Economy

Eurozone inflation falls to low of 0.4%

Posted on July 31, 2014

Eurozone inflation has fallen to a fresh four-and-a-half-year low, moving the 18-country bloc a step closer to outright deflation.

Consumer price inflation in the euro area fell to 0.4 per cent in the year to this month, down from 0.5 per cent in June, according to a flash estimate from Eurostat, the European Commission’s statistics bureau.

    The last time eurozone inflation was this subdued was in October 2009, when prices fell 0.1 per cent. The latest dip leaves inflation at less than a quarter of the European Central Bank’s target of below but close to 2 per cent.

    The July estimate was slightly less than analysts’ expectations of 0.5 per cent, though some economists lowered their forecasts on Wednesday on the back of signs price pressures had moderated in two of the region’s largest economies, Germany and Spain.

    Italian prices were the same as a year ago, according to data published on Thursday.

    The weakness in inflation across the bloc has stemmed from lower energy and food prices, which are traditionally more volatile than those of other items. The core measure, which excludes these goods, stayed at 0.8 per cent, indicating the latest dip in price pressures is not the result of weaker demand.

    Energy prices have fallen 1 per cent over the past year, according to Eurostat. Food, drink and tobacco costs are down 0.3 per cent.

    While the ECB is committed to tackling a “too prolonged period of low inflation”, policy makers are unlikely to ease monetary policy at their meeting next Thursday.

    Officials have signalled that, barring a significant economic shock, they will wait until the end of this year to assess the impact of a package of measures announced in June before deciding whether to act again.

    A survey of credit conditions, published on Wednesday, showed lending standards for the bloc’s businesses had eased for the first time since the crisis began. There has also been better news in recent weeks on the bloc’s fledgling recovery, with economic activity strengthening in July.

    Sonali Punhani, an economist at Credit Suisse, said: “As far as the ECB is concerned, we think [policy makers] will look through the current inflation weakness and we don’t expect additional monetary policy measures.

    “That the inflation rate was low due to lower food and energy prices rather than weaker core inflation or weaker fundamentals might be positive for growth and consumer spending.”

    Inflation could fall again next month, however, placing more pressure on the central bank to embark on large-scale asset purchases, also known as quantitative easing.

    Fabio Fois, an economist at Barclays, said: “A further decline to 0.3 per cent in August is likely; this would be a new cyclical low. Weakness in prices persists, especially those for energy goods.”

    Gizem Kara, of BNP Paribas, said: “Over the next couple of months we continue to expect inflation to remain around its current levels, with risks tilted to the downside.”

    Meanwhile, Eurostat reported that unemployment in the currency bloc had fallen slightly from 11.6 per cent to 11.5 per cent in June.

    Unemployment dropped by 783,000 between May and June, leaving 18.4m people looking for work.

    Regional differences in joblessness remain vast. In Austria and Germany, about 5 per cent of the labour force is unemployed. In Greece, it is more than a quarter and in Spain it is just less than 25 per cent.