Eyes on ECB as eurozone edges towards deflation
THE eurozone is on the brink of sinking into deflation after clocking up its lowest rise in prices for four years.
Inflation dropped in May to 0.1pc year on year, down from 0.3pc, as tum- bling energy prices and disappearing demand took their toll.
Core inflation, which strips out food and energy costs, held firm at 0.9pc but economists warned pressure on prices would continue to build.
The fourth straight monthly drop in the headline inflation rate will increase the pressure on Christine Lagarde’s European Central Bank (ECB) to stop the region sliding into deflation, with consequences for debts, jobs and living standards. Economists have predicted prices will start to fall across the eurozone this year, despite the huge stimulus efforts of policymakers.
Bert Colijn, an ING economist, said: “The severe economic fallout is having a deflationary effect, which means the ECB is likely to stay in a crisis-fighting mode for some time to come. Today’s data leaves little to argue about the strategic course for the ECB.”
The ECB is expected to announce another huge increase in its moneyprinting programme as soon as next week as it fights the economic fallout of Covid-19.
Economists have predicted the ECB’S rate-setters could vote for a €500bn (£450bn) expansion of its pandemic bond-buying programme.
The coronavirus crisis has revived fears that deflation could become entrenched, with prices chasing each other lower.
Deflation occurs when prices keep falling and can be difficult to stop, triggering a vicious downward spiral.
It can tempt consumers to delay spending in anticipation of lower prices in future, pushing costs down still further. This can ultimately hit employment if wages are “sticky” and fail to pull back along with prices, forcing companies to cut costs by axing jobs.