Eurozone inflation revised down to 0.1 percent

AP News
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Posted: Sep 16, 2015 7:16 AM

LONDON (AP) — Inflation across the 19-country eurozone was revised down to 0.1 percent in the year to August, in a development that's likely to renew concern that the region could see another bout of falling prices and prompt more stimulus measures from the European Central Bank.

Figures released Wednesday by the European Union's statistics agency showed that the revision in consumer price inflation from the initial estimate of 0.2 percent was largely due to a sharp drop in energy prices reflecting weakness in the global price of oil.

Given that inflation is way below the ECB's target of just under 2 percent and is widely expected to fall further in coming months, there are growing expectations the central bank will increase its stimulus efforts — especially if the eurozone sees an outright fall in prices for the first time since March.

At first glance, deflation, which is generally defined as a sustained drop in prices, sounds good as it allows consumers to buy things for less. The problem lies when prices fall consistently over time for a range of goods — as opposed to temporary declines prompted by, say, a fall in prices at the pump, which can give economic activity a boost.

Longer-term deflation encourages people to put off spending and can prove difficult to reverse because it requires altering people's expectations. It can lead to years of economic stagnation, as in Japan over the past two decades, or at worst, into something more pernicious, such as the Great Depression of the 1930s.

It's those fears that prompted the ECB to launch a 1.1 trillion-euro ($1.2 trillion) monetary stimulus this year. As part of that stimulus, the ECB is pumping 60 billion euros a month in newly printed money into the eurozone economy by buying government and corporate bonds. The program is slated to run at least through September 2016 and is intended to help get inflation back to target. ECB President Mario Draghi hinted this month that the bank is ready to give the eurozone a bigger dose of stimulus, which could involve buying more bonds or extending the length of the program.

The news from Eurostat prompted some weakness in the euro as traders priced in a growing expectation of further stimulus — the new money created by the ECB can weigh on the currency by diluting its value. The euro was trading 0.4 percent lower at $1.1230.

"The chance of further stimulus from the ECB is growing, which could act to weaken the euro in the coming months," said Craig Erlam, senior market analyst at OANDA.