Eurozone slides into deflation for the first time in four years

Eurozone slides into deflation for the first time in four years

The eurozone slid into deflation for the first time in four years, heaping pressure on the European Central Bank to increase its support for the bloc’s faltering economic recovery from the coronavirus pandemic.

Headline consumer price inflation was minus 0.2 per cent in August, down from an increase of 0.4 per cent the previous month, according to data released by Eurostat on Tuesday, ahead of the ECB’s policy meeting next week.

Analysts blamed the fall on lower oil prices, the recent cut in Germany’s value added tax rate and the delayed summer sales in France, Italy and Belgium. Retailers in those countries usually cut clothing prices heavily between June and July to clear out summer ranges before the autumn season, but this year the sales were delayed until August.

“It’s quite worrying,” said a member of the ECB governing council. “There had been a peak in textile sales over the summer but that seems to have evaporated now.”

Annual price growth in services also fell to an all-time low of 0.7 per cent in August. Core inflation, which excludes energy, food and tobacco prices, fell to a record low of 0.4 per cent in August, down from 1.2 per cent in July.

Frederik Ducrozet, strategist at Pictet Wealth Management, called the inflation figures, which were much lower than expected, a “brutal reality check” for the ECB.

Florian Hense, economist at Berenberg, said: “Given the recent volatility in the data, the ECB may choose to look through the considerable short-term variations. If inflation remains very low, the ECB may decide in December to extend its crisis-response asset purchase programme.”

Deflation hit 12 of the 19 eurozone countries in August, including Germany, Italy, Spain, Portugal and Greece. The recent appreciation of the euro against other currencies is likely to put downward pressure on inflation by lowering the price of imports.

When the ECB meets on September 10 it is widely expected to further lower its forecast for inflation to reach 1.3 per cent by 2022. This would still be well below its core target of just below 2 per cent.

“If core inflation continues to fall, pressure on the ECB to amplify its monetary support to the economy will increase,” said Daniela Ordonez, economist at Oxford Economics.

The ECB already cut its medium-term inflation forecast in June, which it said was one of the main reasons for expanding its emergency bond-buying programme from €750bn to €1.35tn and extending it into 2021.

But there have been signs that the central bank is determined to leave its monetary policy unchanged. Isabel Schnabel, its executive director, told Reuters this week: “As long as the baseline scenario remains intact, there is no reason to adjust the monetary policy stance.”