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Eurozone inflation hits 5-yr low in challenge to ECB

30 September 2014, 21:12 CET
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(BRUSSELS) - Eurozone inflation dropped to the lowest level since the worst of the global financial crisis, EU figures showed on Tuesday, heaping pressure on the European Central Bank to go even further to avert the threat of deflation.

Growing concerns about exceptionally low price rises in the 18-country eurozone, which could augur a long period of low growth and falling prosperity, have prompted the ECB to take unprecedented action in recent months.

But inflation fell again to 0.3 percent in September, the lowest for nearly five years and way below the ECB's near-2.0 percent target.

The EU's data agency Eurostat also reported that eurozone unemployment remained unchanged at a high 11.5 percent in August, another sign that a hoped for recovery in the currency area was certainly over.

"September's fall in eurozone inflation to a whisker above zero and August's weak labour market data will add to the pressure on the ECB in the run-up to its meeting this Thursday," said Jennifer McKeown, Senior European Economist at Capital Economics in London.

Unemployment in the eurozone is down from the record high of 12.0 percent a year ago, but still remains stubbornly present in several member countries.

In August, unemployment in Spain fell from 26.2 a year ago to a still alarmingly big 24.1 percent. Half of Spain's young workers remain jobless.

Heavily-indebted France, the bloc's second biggest economy, saw unemployment rise from 10.2 percent to 10.5 percent in 12-months.

However in Germany, the bloc's economic engine, August unemployment stood at a low 4.9 percent for August.

- Sluggish demand -

But for now, low inflation has become the central challenge to turn around the eurozone economy, with sluggish demand from households and businesses keeping prices low.

If deflation, a sustained period of falling prices, takes hold, there will be a danger that businesses and households will delay purchases, further depressing demand, employment and growth. Central banks have great difficulty in reversing such a downward spiral if it takes hold.

"The ECB is very likely to have to revise down its inflation forecast of 0.7 percent for this year in December," said Christian Schulz, Senior Economist at Berenberg Bank.

"We expect the ECB to announce ambitious asset purchases at the meeting this week and to keep the door for outright quantitative easing, including the purchase of sovereign bonds, wide open," he added.

September's inflation figure fell from 0.4 percent in August and was the lowest since October 2009, at the height of the global financial crisis.

The data largely reflected what emerged on Monday, when powerhouse Germany showed inflation remained stuck at the ultra-low level of 0.8 percent for the third month in a row in September.

In Belgium, prices decreased by 0.12 percent in September, the first time they have fallen since November 2009. In Spain, the fourth-largest economy in the eurozone, consumer prices fell for the third month in a row this month, down 0.3 percent on a yearly basis.

At its meeting last month, the ECB surprised the markets by cutting its key interest rates to new all-time lows and unveiling loan-buying programmes to ward off deflation in the single currency area.

But this still fell short of outright quantitative easing, the term for massive bond buying schemes carried out by the central banks in the US, Japan and Britain to mixed effect.

"The ECB will soon take the plunge into full-blown quantitative easing," McKeown predicted.

Euro area annual inflation down to 0.3% [Eurostat]

Euro area unemployment rate at 11.5% [Eurostat]


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