Inflation in the eurozone hits five-year low of 0.3%

Eurozone inflation dropped to a fresh five-year low in August, something likely to concern the European Central Bank but not force it into immediate policy action.

Consumer prices in the 18 countries using the euro rose by just 0.3%, year-on-year, in August, the smallest increase since October 2009, the EU’s statistics office Eurostat said yesterday. The number matched market expectations.

The ECB targets an inflation rate at below-but-close to 2% over the medium term, a level not seen since the first quarter of 2013. It also considers anything below 1%, over time, to be in a “danger zone”.

Inflation moving ever closer toward zero, a stagnating economy, a double-digit unemployment rate and increasing signs of reform fatigue among eurozone governments are posing a tough challenge for the ECB that it says it cannot solve alone.

In a landmark speech at a central banker gathering in Jackson Hole last week, ECB President Mario Draghi said it would be “helpful for the overall stance of policy” if fiscal policy could play a greater role alongside the ECB’s monetary policy.

He got backing on Thursday from German Finance Minister Wolfgang Schaeuble, who told Bloomberg that monetary policy could only buy time and had run out of tools, calling instead for more investment without running excessive deficits.

Others believe the ECB should do more to stimulate growth.

“This is yet another bad indicator of the health of the eurozone economy,” said Aberdeen Asset Management Investment Manager Luke Bartholomew. “We are now relying on Draghi the politician not Draghi the economist to get Europe out of this mess. He is walking a tightrope between conservative European institutions and the markets desire for more stimulus.”

The drop in August inflation was led by a 2% decline in the highly volatile prices of energy. Prices of food, alcohol and tobacco fell by 0.3% for a second month in a row. Core inflation, which strips out such volatile components, rose to 0.9% from 0.8%.

“Core inflation resilience at just below 1% confirms that outright deflation remains unlikely,” said Marco Valli, chief eurozone economist at UniCredit.

Reuters