Eurozone falls back into deflation

GMT 15:29 2015 Wednesday ,30 September

Arab Today, arab today Eurozone falls back into deflation

European Central Bank
Brussels - AFP

Eurozone inflation unexpectedly fell to negative 0.1 percent in September, data showed Wednesday, suggesting a dangerous spell of falling prices could be returning to Europe.

The return to negative territory will add to pressure on the European Central Bank to increase its huge stimulus programme which is meant to ward off deflation and keep the economy on track.

Analysts surveyed by Bloomberg had expected a zero rate after a gain of 0.1 percent in August.

Earlier this month, ECB head Mario Draghi warned that inflation in the 19-country eurozone could turn negative in the coming months, even if only temporarily.

In March, the ECB launched a more than one-trillion-euro stimulus plan running through to September next year in order to get inflation closer to its 2.0 percent target.

"It looks like being a long and arduous slog before eurozone consumer price inflation gets up near the ECB’s target rate," said Howard Archer of IHS Global Insight.

"Indeed, it looks increasingly unlikely to happen until 2018," he said.

The fear is that deflation could become entrenched if consumers delay purchases in the hope of buying products cheaper later, which in turn prompts companies to hold off investment, creating a vicious circle of falling demand and fewer jobs.

The ECB's scheme initially appeared to work, slowly pushing inflation back up in core eurozone economies such as France and Germany.

But the rise has now stalled in Germany, the eurozone's biggest economy, where inflation stood at zero.

The ECB believes that the present fall in prices is driven primarily by cheap oil and will end with energy prices now stabilising.

"The slowing effects on inflation brought on by the fall in energy prices will be temporary," Jens Weidman, the head of Germany's central bank and an ECB board member said Tuesday.

Analysts however think the ECB will have to increase its massive Quantitative Easing stimulus programme to ensure the slip into negative territory is only temporary.

The Eurostat statistics agency also said Wednesday that eurozone unemployment was unchanged at 11 percent in August.

Unemployment in the eurozone has fallen steadily from the 12.1 percent peak reached in 2013.

Crisis-hit Greece again posted the highest rate of unemployment in the eurozone at 25.2 percent in June, the latest data available.

On the path of economic recovery, Spain posted a still high 22.2 percent, though this was down from 24.2 percent a year ago.

French unemployment crept higher to 10.8 percent from 10.4 percent a year ago, keeping the pressure on President Francois Hollande who has vowed to forego running for a second term if the trend is not reversed.

German unemployment remained at historically low level of 4.5 percent, as measured by Eurostat.

"While the eurozone’s unemployment rate has edged down over the past couple of years, progress has been slow," said Jack Allen, of Capital Economics, adding that any jobs recovery "will continue at a sluggish pace."

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