Euro zone CPI falls in August

Eurostat has revealed that the CPI in the euro zone declined in August by an annual rate of 0.2% and followed the record 0.7% fall in July.

Analysts were encouraged by the slower rate of decline in consumer prices and Nick Kounis of Fortis commented: “We think that the negative impact of energy prices is starting to unwind. This process has much further to go and it is likely to push inflation back into positive territory in the final months of this year.”

“The report supports the ECB in its view that the recent period of negative annual inflation rates will prove to be a short-lived phenomenon that has no implications for monetary policy,” added Mr Kounis.

Lower energy and food prices have driven inflation down but a risk of deflation is highly unlikely according to many analysts.

A short period of deflation (where prices fall rather than increase) could be a serious threat to the economy because it deters consumers and businesses from spending in expectation of falling prices.

The European Central Bank (ECB) has a target rate for inflation of just under 2%. It reached a high in July 2008 when oil peaked at $147 a barrel.

Howard Archer, chief European economist at IHS Global Insight, said: “It seems highly probable that July marked the deepest deflation in the euro zone and consumer prices will turn positive year-on-year within the next couple of months.”

The ECB is to meet this week and announce its decision on interest rates and markets expect no change to the rate of 1%.

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