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People carrying shopping bags near Malaga, southern Spain July 30, 2014. (JON NAZCA/REUTERS)
People carrying shopping bags near Malaga, southern Spain July 30, 2014. (JON NAZCA/REUTERS)

Euro zone inflation rate drops in July; unemployment falls slightly Add to ...

The inflation rate in the 18-nation euro zone dropped again in July, official data showed Thursday, likely adding pressure on the European Central Bank to beef up its efforts to spur the economy.In a preliminary estimate, Eurostat, the European Union’s statistical agency, said inflation fell to 0.4 per cent from the previous month’s 0.5 per cent, where analysts were predicting it to remain. Inflation is at its lowest reading since October 2009, when the world economy was hit by a raging financial crisis that caused severe recessions.

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Low inflation is a worry because it can lead to deflation, in which falling prices choke off growth. Escaping from deflation can take years, if not decades, as in Japan’s case.

“The ECB has more work to do to tackle the risk of deflation,” said analyst Jonathan Loynes of Capital Economics.

The ECB has already cut interest rates and vowed to get inflation back toward the 2 per cent target within two years. But it has so far refrained from the bolder step of large-scale asset purchases, a policy that other major central banks like the U.S. Federal Reserve have used with some success.

Howard Archer, economist at analysis group IHS, said the drop in the overall inflation rate is partly attributable to a fall in energy prices, which are volatile. In fact, the core inflation rate, which excludes volatile food and fuel costs, remained unchanged on the month at 0.8 per cent.

Thursday’s figures nevertheless come as “a blow for the ECB,” especially since the economic outlook remains weak, suggesting inflation is unlikely to rise any time soon.

“There is undeniably a very real risk that euro zone consumer price inflation could go lower still ... barring an appreciable rise in oil and gas prices resulting from geopolitical factors hitting supplies,” he said, referring to the current tension with Russia, which is a major oil and gas supplier for Europe.

The ECB in June already cut its benchmark interest rate to 0.15 per cent and cut another rate into negative territory for the first time to counter the threat posed by low inflation. It also promised billions in cheap loans for banks on condition they lend more to businesses.

Analysts say the next step to help shore up the bloc’s weak economy and inflation rate would be launching a program of asset purchases. Such a program involves injecting new money into the economy by buying large amounts of bonds and other financial assets.

The euro zone officially came out of recession in last year’s second quarter, but growth remains weak. Output grew by only 0.2 per cent in the first quarter from the previous three-month period.

In more upbeat data, the euro zone’s unemployment rate fell slightly from 11.6 per cent in May to 11.5 per cent in June, its lowest value since September 2012, Eurostat said. The drop beat analysts’ consensus expectations, which forecast the jobless rate to stay flat, according to data service FactSet. The number of jobless in the euro zone fell by 150,000 to 18.4 million in the euro zone, which encompasses 330 million people.

For the wider 28-nation EU, which includes members like Britain and Poland that don’t use the euro currency, unemployment dipped from 10.3 per cent to 10.2 per cent.

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