Eurozone April Inflation Fails to Dispel Deflation Concerns

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Eurozone inflation picks up but short of forecast

BRUSSELS, (AFP) – Eurozone inflation picked up in April but still fell short of forecasts against a background of concerns deflation could derail a very modest recovery, official data showed Wednesday.
Consumer price inflation rose to a 0.7 percent rate in April, below analyst estimates for 0.8 percent while up from the 0.5 percent in March which was the lowest since October 2009.
Analysts said the uptick in April was welcome but overall did little to calm nerves over the possible deflation threat.
The figures “might ease some of the immediate pressure on the European Central Bank” to take further action to bolster the economy, said Jonathan Loynes at Capital Economics.
“But they do not alter the big picture of growing deflation dangers,” Loynes said.
The figures highlight “the disinflationary forces at work … and there are good reasons for thinking these forces will strengthen further,” he said.
“Accordingly, we still believe that the ECB has more work to do to eradicate the risk of a damaging bout of deflation in the eurozone.”
The Eurostat data agency said service sector prices rose 1.6 percent in April, up from 1.1 percent in March but as analysts noted, other categories were weaker.
The rate of price increases for food and alcohol fell to 0.7 percent from 1.0 percent while energy costs dropped 1.2 percent, compared with a fall of 2.1 percent in March.
– Inflation trending lower –
Inflation in the 18-nation eurozone has fallen steadily in the past year, reflecting weak demand as the economy recovers only slowly from a record recession.
Economists worry that ultra-low inflation could stall the rebound while outright deflation could even put it into reverse since falling prices mean companies halt investment and consumers put off purchases.
    
Combined, that hits jobs and wages, which in turn puts fresh pressure on the economy.
Howard Archer at IHS Global Insight said that if the ECB currently sees the deflation threat as limited, it cannot be discounted and the April report does nothing to change the overall picture.
“The spectre of prolonged very low inflation destabilising medium-term inflation expectations is a very real and troubling risk for the ECB,” Archer said in a note.
“While the Eurozone should avoid overall deflation … inflation is likely to remain low for a prolonged period and some countries will experience deflation,” he said, citing Portugal, Greece, Cyprus and Slovakia, with Ireland, Spain and “perhaps Italy” also at risk.
Christian Schulz at Berenberg Bank said the April figures overall showed inflation “on a continued downtrend.”
“The ongoing recovery will reduce slack in the economy over time and should thus stabilise domestic inflationary pressures (but) it will do so only gradually,” Schulz said.
The ECB has an inflation target rate of just under 2.0 percent and while playing down deflation concerns, has said it is ready to take further action on top of record-low interest rates to boost demand if needed.
Earlier this month, International Monetary Fund chief Christine Lagarde said it was just “a question of timing” when the ECB would have to take additional measures to tackle the problem.
The ECB holds its regular monthly meeting next week after holding policy steady in recent months.

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