Disappearing euro zone inflation set to heighten ECB concerns

Fri Aug 29, 2014 9:11am EDT
 
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By Martin Santa and Eva Taylor

BRUSSELS/FRANKFURT (Reuters) - Euro zone inflation dropped to a fresh five-year low in August, data showed on Friday, 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 percent year-on-year in August, the smallest increase since October 2009, the European Union's statistics office Eurostat said. The number matched market expectations.

The ECB targets an inflation rate at below-but-close to 2 percent over the medium term, a level not seen since the first quarter of 2013. It also considers anything below 1 percent 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 euro zone 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 euro zone 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."   Continued...

 
People receive food that is either too old or not looking nice enough for sale at the non-profit Dortmund food bank "Dortmunder Tafel"  in the western German city of Dortmund March 20, 2013. REUTERS/Ina Fassbender