Eurozone Inflation Drops Again

Written by | Tuesday, August 5th, 2014

Annual inflation in the European common currency area went down last month to its lowest level since the beginning of the financial crisis five years ago. The dangerously low inflation rate still alarms policymakers but analysts think that the European Central Bank (ECB) is unlikely to intervene with another policy action. The ECB is to hold a policy meeting on Thursday (7 August) but no breakthrough is generally expected. The bank actually said that the current inflation in the eurozone still remained consistent with its target of having the rate of inflation under 2 percent. However, ECB’s President, Mario Draghi, assured that the bank was ready to take further unconventional measures, if needed, to tackle possible risks. The current rate of 0.4 percent fuels concerns despite some positive developments in the labor market. Much of the fall in inflation is associated with a drop in volatile energy prices, EU Statistical Office Eurostat informed. In contrast, core inflation – that is inflation excluding the prices of food, tobacco, alcohol, and energy – did not change, staying at 0.8 percent for the second month in a row.

Chief eurozone economist at ING Bank, Peter Vanden Houte, confirms that the latest numbers do not provide any assurance that the euro zone is already out of the danger of deflation. He added that because of the conflict with Russia and the associated repercussions, the risk of deflation might not vanish very soon. Economists generally agree that outright deflation in the eurozone would mean risks amid expectations that sharp food price disinflation will be drawn to a close and energy prices may go up again. Looking at individual EU member states, Germany’s inflation eased to 0.8 percent after both ECB and the Bundesbank, both based in Frankfurt am Main, had announced the need to increase wages as unemployment remained stable in the country. In contrast, Spain witnessed deflation of 0.3 percent last month after the economy grew at its fastest pace since 2009.

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