Data released today (29/08/2014) by Eurostat show that the Eurozone’s consumer price inflation rate has fallen further, dropping to 0.3% in August from 0.4% in July. The unemployment rate stayed stable at 11.5% for July.

The main contribution to the drop in inflation came from energy costs, which fell by 2.0% in the year to August, compared to 1.0% in the year to July. Food, alcohol and tobacco also fell by 0.3%. The core inflation rate – which excludes these items – rose to 0.9%: better, but still far short of the European Central Bank’s target of just below 2.0%. 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.

Unemployment remains stubbornly high at 11.5%, as expected. August’s economic news for the Eurozone has been almost unremittingly negative. The GDP figures for the second quarter showed that the three largest economies all failed to grow and Italy fell back into recession; industrial production saw a fall of 0.3% during June; and the most recent economic sentiment figures showed a substantial fall between July and August, including a fall in consumer sentiment. Given this news, unemployment is likely to remain high for some time.

Today’s news will further increase pressure on the European Central Bank to unleash a quantitative easing programme to stimulate price rises and ultimately spending. The negative deposit rate and €400 billion lending programme unveiled in June have been followed by further falls in the inflation rate and worse-than-expected growth figures. The ECB head Mario Draghi’s latest speech, at the annual forum of central bankers at Jackson Hole, hinted that the ECB would be prepared to use further unconventional measures. The main opposition comes from the Bundesbank, which could use legal prohibitions to prevent it. Draghi’s comments also seemed to make the case for a more accommodative stance on fiscal policy, another option deeply unpopular with German policymakers. However, the gravity and seeming intractability of the problem mean that these previously unthinkable options are now on the table. ECB staff will meet on September 4th to decide its next move. 

 

Eurozone seasonally adjusted unemployment rate (left axis) and Eurozone consumer price index, annual percentage change (right axis)