Weak inflation is putting the ECB under pressure

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Weak inflation is putting the ECB under pressure




The ECB is aiming for almost two percent inflation as the ideal value for the economy.


© dpa
The ECB is aiming for almost two percent inflation as the ideal value for the economy.


Consumer prices fell in August compared to the same period last year. This means that euro inflation is negative for the first time since 2016.

The Inflation in the euro zone fell significantly in August. Consumer prices fell by 0.2 percent compared to the same period last year, as the European statistical agency Eurostat estimated on Tuesday. In July, inflation was 0.4 percent. Now it is negative for the first time since 2016.

The weak inflation figures are bad news for the European Central Bank. It is aiming for inflation just below two percent for the euro area. However, it has long since failed to achieve this goal. The EZB buys large volumes of government bonds from euro countries to boost inflation and stabilize the economy in the corona crisis. At the moment, however, inflation is moving further away from its target.

“The inflation trend is pointing downwards. That sets the EZB under pressure ahead of their council meeting on September 10th, ”comments Frederic Ducrozet, economist at the Swiss asset manager Pictet. He considers the particularly low price increases for services to be particularly worrying. Inflation there was 0.7 percent – and thus at an all-time low.

The weak inflation figures are also related to one-off effects. In Germany, for example, the federal government temporarily lowered VAT in the fight against the Corona recession by the end of the year. It reduced the regular tax rate from 19 to 16 percent and the reduced rate from seven to five percent. In addition, the summer sales in Italy and France were postponed, which also had a dampening effect.

But even taking into account the special effects, the price development is weak. Energy prices fell particularly sharply with a minus of 7.8 percent compared to the same period of the previous year. The low oil price is noticeable here. Industrial goods without energy were also 0.1 percent cheaper.

Groceries, alcohol and tobacco, however, rose by 1.7 percent. If energy is excluded, the total annual inflation would have been significantly higher at 0.7 percent. Recently, however, the oil price has recovered somewhat and is now around 35 percent higher than in June.

Another important factor for the price level is the currently strong euro exchange rate. Although it takes time for it to be fully reflected in prices, it has a dampening effect on inflation. Since the beginning of June it has appreciated by over seven percent compared to the US dollar. This tends to make imports in the euro area cheaper.

In view of the weak inflation, Frederik Ducrozet expects that the ECB will expand its bond purchases again in December, by probably 500 billion euros. Most recently, she expanded purchases in June by 600 billion euros to 1.35 trillion euros.

More: You can find details on German inflation in August here.

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