Eurozone gripped by deflation fears as inflation rate hits five-year low.

Eurozone gripped by deflation fears as inflation rate hits five-year low

ECB chief Mario Draghi is under pressure to act but experts say immediate measures are unlikely

Katie Allen

The Guardian, Friday 29 August 2014 / http://www.theguardian.com/world/2014/aug/29/eurozone-deflation-gear-inflation-five-year-low

Fears that the eurozone could tip into outright deflation have been fanned as the inflation rate in the currency bloc hit a new five-year low of 0.3%.

Pressure on the European Central Bank chief, Mario Draghi, to head off the threat of falling prices intensified as annual inflation in August fell from 0.4% in July, according to Eurostat, the EU's statistics agency. Separate figures showed the economic woes of the region continued to take their toll on workers, with the unemployment rate for July unchanged at 11.5%.

Both numbers had been forecast by economists, who said the inflation numbers were likely to concern the ECB, but not push it into any immediate measures.

"The very low eurozone inflation reading for August reinforces pressure on the ECB to consider further monetary stimulus on top of what is already in the pipeline," said Martin van Vliet, of ING. "With inflation inching towards zero, the cushion against deflation is getting smaller and smaller."

Experts noted that the August fall was driven by a drop in volatile energy prices and there was some downward pressure from food prices, also liable to big swings. But even the core inflation rate, which strips out the more volatile goods, was cause for concern, said Alasdair Cavalla at the Centre for Economics and Business Research. It rose to 0.9% from 0.8%, which was "better, but still far short of the European Central Bank's target of just below 2.0%," Cavalla said.

"The weakness of demand means that core inflation is also at risk of falling. The probability of Europe falling into a deflation trap, where consumers postpone spending to wait for lower prices and debts rise in real terms, rises each time inflation falls."

Finding itself up against high unemployment, worryingly low inflation, lacklustre growth and rising political tensions over austerity within many member states' governments, the ECB has called on political leaders to play a greater role in shoring up the eurozone. Draghi used a speech to the US Federal Reserve conference in Jackson Hole, Wyoming, earlier this month to call for more growth-friendly policies. But he gave little away about the ECB's plans when it sets interest rates next week.