Inflation at 5-Year Low Primes ECB for Deflation Debate

By Ian Wishart  

Photographer: Martin Leissl/Bloomberg

ECB President Mario Draghi told lawmakers in Brussels on Sept. 22 that policy makers... Read More

Euro-area inflation slowed in September to the lowest level in five years, challenging European Central Bank officials gathering this week to decide whether more measures are needed to avert deflation.
Consumer prices rose an annual 0.3 percent, the European Union’s statistics office in Luxembourg said today. That’s in line with the median estimate in a Bloomberg News survey and follows a reading of 0.4 percent in August. Unemployment (UMRTEMU) held at 11.5 percent in August, Eurostat said in a separate report.
ECB President Mario Draghi told lawmakers in Brussels on Sept. 22 that policy makers remain “fully determined” to shore up inflation, which has
undershot the central bank’s goal since early 2013. Policy makers have agreed on unprecedented stimulus in the past four months, and are set to unveil details of an asset-purchase plan that will help add as much as 1 trillion euros ($1.3 trillion) to the ECB’s balance sheet.
Inflation data are “providing support for ECB advocates of more-decisive monetary easing,” said Christian Schulz, senior economist at Berenberg Bank in London. “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.”
The euro fell to a two-year low against the dollar after the report. It was down 0.6 percent and traded at $1.2606 at 12:05 p.m. Frankfurt time.

Core Inflation

Energy prices dropped 2.4 percent in September from a year earlier after falling 2 percent the previous month, today’s preliminary report shows. Prices of alcohol, food and tobacco increased 0.2 percent, while the cost of services was up 1.1 percent.
The core inflation rate, which strips out volatile items such as energy, food, tobacco and alcohol, slowed to 0.7 percent this month from 0.9 percent in August, according to Eurostat, which will release updated data on Oct. 16.
Low inflation “is a sign of incredible weakness of economic activity in the euro zone,” said Christopher Matthies, an economist at Sparkasse Suedholstein in Neumuenster, Germany. “It’s looking bleak right now, and I don’t see any short-term relief.”
Euro-area economic confidence slipped this month to the lowest level since November, while manufacturing and services growth unexpectedly slowed to the weakest pace this year, according to preliminary data by Markit Economics.

ECB Meeting

In addition to cutting interest rates to record lows and offering long-term loans to banks, the ECB has committed to buy asset-backed securities and covered bonds to steer price gains back toward its goal of just under 2 percent. Details of the plan are set to be revealed after the 24-member Governing Council meets in Naples, Italy, on Oct. 2.
Policy makers will leave the benchmark rate unchanged at 0.05 percent and the deposit rate at minus 0.2 percent, according to all economists in a separate Bloomberg News survey.
The euro-area jobless rate in August was in line with the 11.5 percent median forecast of 29 economists in a Bloomberg News survey and down from last September’s peak of 12 percent.
Spain had the highest unemployment rate across the bloc, at 24.4 percent, and Austria the lowest, at 4.7 percent.