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Eurozone inflation falls to 0.3 pct as deflation knocks Unemployment rate steady at 11.5 pct in July

 BRUSSELS, Aug 29, (Agencies): Eurozone inflation fell to 0.3 percent in August, raising the dangers of deflation and also pressure on the European Central Bank to open up the cash floodgates, data showed on Friday. The latest fall takes the rate down from 0.4 percent in July and from 1.3 percent a year ago, and to far below the ECB’s target of just under 2.0 percent. The latest twist downwards, against a background of worryingly sluggish eurozone growth, was driven by falls in the prices of food and energy, the European Union’s statistical arm Eurostat, which published the figure, said.

Eurostat also reported that the eurozone unemployment rate in July was steady at 11.5 percent from the level in June. This means that the rate is running at the lowest level since September 2012, and marks a decline from 11.9 percent in July last year. But the rate is high, and exceptionally high in some countries such as Spain, Greece and Italy. It is also running at a new record high level in France, which has just been hit by a major political crisis over slow growth, high unemployment and the need for deep reforms. In July, there were 18.4 million people unemployed in the 18-member countries of the eurozone. However, this was 725,000 fewer than in July last year, but the number of unemployed edged up in the month. The figures, mainly the inflation data, increase evidence that the eurozone is flirting with deflation, a climate of falling prices which can cause businesses and consumers to delay purchases.
That can further reduce demand and prices and push up unemployment, a spiral which central banks find extremely difficult to counter. The ECB, which meets on Thursday, has already lowered interest rates to record low levels, even going as far as a negative rate. The bank, which has a main statutory duty to ensure price stability at just under its target of 2.0 percent, is widely considered to be moving towards quantitative easing. That is a radical policy of buying securities on a big scale to inject cash into the economy in the hope that this will raise activity, push down the euro and therefore push up prices.
A member of the ECB’s policy council, Ewald Nowotny, governor of the Austrian central bank, said late on Thursday that he was “worried” about the outlook for eurozone growth, and that recovery was slower than the ECB had expected. Low growth tends to cause inflation to fall, as does a high exchange rate. At Berenberg bank in London, economist Christian Schulz outlined the mix of factors at work in the inflation data which was “likely to feed into more discussions in Frankfurt (ECB) about further policy easing.” “Core inflation actually increased slightly from 0.8 percent to 0.9 percent in August,” he said.
“Much more important than inflation rates now is the economic rough patch caused by the crisis in Eastern Ukraine.”
This raised the risk “that the Eurozone recovery may be interrupted for longer” holding down inflation for longer. “The ECB is likely to step up its response by December at the latest,” he said.
Capital Economics analysts said the underlying inflation data was “very weak” and “should encourage the ECB to offer stronger hints of additional policy support to come after its meeting next week”. The unemployment data showed that the number of people unemployed had risen by 4,000 in the month, the first increase since September 2013 adding to signs that “the labour market recovery is already petering out”.
They said that although the ECB was “unlikely to act at its meeting next week, it is likely to hint that quantitative easing is firmly on the table”. ECB President Mario Draghi has warned that inflation expectations are worsening and says the bank will add more stimulus if needed. Many analysts predict the ECB will eventually launch large-scale purchases of financial assets to pump more money into the economy. The bank’s governing council meets on Thursday, but experts generally think it will hold off for several more months as it waits to assess the impact of earlier stimulus efforts.
The bank has already taken steps to boost growth and prices, cutting its key interest rate in June to 0.15 percent and offering cheap loans to banks on condition they lend more to companies.
Consumers like low inflation because it makes their paychecks go further in stores. But it is a sign of overall weak demand. And it has been so low for so long that it has raised fears of deflation, a crippling downward price spiral that comes about when people hold off buying things because they think prices will fall further.
Europe’s economy grew for four quarters but then the recovery came to a halt in the second quarter of this year as core economies France and Germany stalled. Most economists predict growth will resume in coming quarters but it is feared that uncertainty over the crises in Ukraine and the Middle East will keep the recovery too weak to reduce high unemployment.
Draghi has said that if needed the bank could make large-scale purchases of financial assets, known as quantitative easing, or QE. That step adds newly created money to the economy and in theory can lower longer term borrowing costs for companies and increase the rate of inflation.
“Today’s data should provide fresh fuel for speculation about broad-based bond purchases (QE) by the ECB,” wrote analyst Christoph Weil at Commerzbank. “We now put the probability of QE at 60 percent.”
By considering more stimulus, the ECB is leaning in the opposite direction from that of the US Federal Reserve, which is expected to halt its asset purchases later this year as the US economy grows more strongly.

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