Inflation slump in Europe could presage more stimulus

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October 2, 2020 3:51 PM

The consumer price index was down 0.3 per cent in September, even lower than the minus 0.2 per cent figure in August, according to new figures released Friday by the European Union statistics agency.

Weak inflation can also make it harder for indebted countries in the eurozone to improve their competitiveness compared with the other members of the currency bloc.

Annual inflation in the 19-country eurozone sagged further below zero in September, bolstering expectations that the European Central Bank will add to its emergency stimulus efforts aimed at cushioning the impact of the pandemic on the economy.

The consumer price index was down 0.3 per cent in September, even lower than the minus 0.2 per cent figure in August, according to new figures released Friday by the European Union statistics agency.

Excluding volatile food and fuel prices, the inflation rate was 0.2 per cent in September, down from 0.4 per cent in August. The so-called core inflation figure is often considered the better measure of price movements in the economy as a whole.

Low inflation is a major reason why analysts predict the ECB will add to its 1.35 trillion-euro (USD 1.6 trillion) programme of regular bond purchases, which push newly printed money into the financial system. The pandemic emergency purchases are credited with keeping borrowing costs down and preventing turmoil on financial markets that would have worsened the recession caused by the virus.

The ECB’s goal is to have annual inflation of just under 2 per cent. Economists say the pandemic is contributing to low inflation as merchants keep prices down in hopes of attracting customers amid restrictions on travel and activity.
While low inflation can benefit consumers up to a point, weak prices over a period of time can be a sign of too much slack in the economy. Weak inflation can also make it harder for indebted countries in the eurozone to improve their competitiveness compared with the other members of the currency bloc.

The recent string of low inflation figures has been attributed to one-time factors such as the late start of summer sales in France and Italy affecting the prices of clothes and shoes. But it is also being attributed to businesses like hotels and airlines, which have been among the hardest hit by the coronavirus outbreak, slashing their prices to entice buyers.

At the ECB’s September 10 meeting President Christine Lagarde gave little indication that more stimulus was coming but said the bank stood ready to adjust its programs if needed. The bank’s 25-member governing council next meets on October 29 and December 10, although it can enact new measures at any time.

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