Eurozone inflation drops to 0.3%

July dip,11.5% jobless rate worry European Central Bank

Job seekers stand at computer terminals inside a job center Thursday in Cahors, France. Unemployment in the eurozone in July was 11.5 percent, the European Union’s statistics agency said Friday.
Job seekers stand at computer terminals inside a job center Thursday in Cahors, France. Unemployment in the eurozone in July was 11.5 percent, the European Union’s statistics agency said Friday.

FRANKFURT, Germany -- Inflation in the eurozone continued to decline in August while unemployment hovered near record-high levels, according to official data released Friday, reinforcing expectations that the European Central Bank would soon take more forceful action to prevent a downward price spiral.

Inflation in the eurozone fell to 0.3 percent from 0.4 percent in July, according to a preliminary estimate by Eurostat, the European Union's statistics agency. The fall was in line with analysts' predictions.

Unemployment in the eurozone in July remained stuck at 11.5 percent, Eurostat said. The level of joblessness remained too high to remove concerns about very low inflation, which creates problems for borrowers and can lead to deflation, a broad decline in prices that causes consumers to delay purchases and undercuts corporate profits and jobs.

Eurostat said 18.4 million people were out of work in the eurozone in July, and nearly 25 million were jobless in the wider European Union, where the unemployment rate was unchanged at 10.2 percent in the same month.

With inflation creeping closer to zero, analysts consider it ever more likely that the European Central Bank will begin large-scale asset purchases, the same kind of quantitative easing that has been used by the Federal Reserve to revive the U.S. economy.

Most analysts do not expect the European Central Bank to announce a quantitative-easing program Thursday, when the bank's governing council holds its monthly monetary policy meeting. The central bank will probably wait until it has a better idea of the effectiveness of earlier measures, including a program to encourage bank lending to businesses, before taking any further action.

But Mario Draghi, the president of the central bank, could signal Thursday that a quantitative-easing program is being prepared and could be deployed this year or early in 2015.

"We now expect the ECB to launch a broad-based asset purchase programme -- QE -- by the end of the year," analysts at Credit Suisse wrote in a note to clients Friday. "Importantly, we think this could be clearly telegraphed to markets as soon as next week's governing council meeting."

Many economists, as well as central bankers from other countries, say the European Central Bank should have already begun quantitative easing to pump money into the economy, because the eurozone is well on its way to a lost decade of stagnant growth.

But quantitative easing is much more difficult to deploy in the eurozone than in the United States. Large-scale purchases of government bonds, the asset most readily available, would provoke stiff opposition in Germany and probably legal challenges. Officials of the Bundesbank, the German central bank, consider purchases of government bonds to be a violation of a prohibition against central bank financing of governments.

Many economists say the central bank must accept such risks in order to prevent another recession that could again throw the future of the eurozone into question.

"The ECB is behind the curve," said Zsolt Darvas, a senior fellow at Bruegel, a research organization in Brussels. "The ECB should have acted much earlier to prevent inflation from falling."

Eurostat said the decline in the inflation rate reflected falling prices for food, alcohol and tobacco, as well as lower energy prices. The price of services rose at an annual rate of 1.2 percent while prices for industrial goods, not related to energy, rose 0.3 percent.

Draghi has played down the risk of deflation by pointing out that low inflation is caused mostly by falling energy and commodity prices, which are determined largely by global conditions rather than the situation in Europe.

Draghi has argued that the fall in inflation reflects a necessary decline in prices and wages in crisis countries such as Spain.

Most of the causes of low inflation "are temporary in nature -- though not all of them," Draghi said last week at a conference of central bankers in Jackson Hole, Wyo. But he added: "If this period of low inflation were to last for a prolonged period of time, the risk to price stability would increase."

Business on 08/30/2014

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