Euro zone inflation drops to 0.3% in August

Friday 29 August 2014 16.45
Euro zone prices have been locked below the 'danger zone' of 1% for the past ten months
Euro zone prices have been locked below the 'danger zone' of 1% for the past ten months

Euro zone inflation dropped as expected to a fresh five year low in August, data has shown, but it was not likely to force the European Central Bank into immediate policy intervention next week.

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 European Union's statistics office Eurostat data showed.

Inflation, which dropped unexpectedly to 0.4% in July, has been locked in what ECB President Mario Draghi called a 'danger zone' of below 1% since October last year.

Vanishing inflation strengthens poses problems for the ECB as it tries to respond to the bloc's stalled recovery, which is facing additional struggles because of economic sanctions imposed against Russia in July over its involvement in the deepening conflict in Ukraine.

Any immediate action coming at the ECB's 4 September policy meeting is not considered likely, according to ECB sources talking to Reuters earlier this week. The bank is likely to wait.

The drop in August inflation was led by a 2% decline in the highly volatile prices of energy and a prices of food, alcohol and tobacco falling by 0.3% for a second month in a row in August.

In June, the ECB cut interest rates to record lows, started charging banks to keep their funds overnight and launched a new long-term loan programme, which will start in September and aims to give banks an incentive to lend more to the real economy.

Since then, the ECB has been in a wait-and-see mode, wanting to see the impact of its new liquidity injection first before considering further stimulus measures, though Draghi has stressed repeatedly the ECB stands ready to do more if needed.

The ECB targets an inflation rate at below-but-close to 2%, a level not seen since the first quarter of 2013.

In a separate data release Eurostat said that unemployment in the euro zone was, as expected unchanged at 11.5% for a second month in a row in July, leaving 18.4 million people without jobs in the €9.6 trillion economy.

A cocktail of jobless recovery, sluggish growth and low inflation is a major worry for the European Union and Brussels, the ECB urge governments to speed up implementation of structural reforms, vital for Europe's economy to heal.