Eurozone Slides into Deflation, Heaping Pressure on ECB to Support Economic Recovery

Strategic Insights -

The eurozone has experienced its first deflation in four years, with headline consumer price inflation falling to minus 0.2 percent in August, down from an increase of 0.4 percent in the previous month. The drop was attributed to lower oil prices, Germany's value-added tax rate cut, and delayed sales in France, Italy, and Belgium. Analysts warned that this trend may pressure the European Central Bank (ECB) to take further action to support the region's economic recovery.

Key Takeaways:

  • The eurozone slid into deflation for the first time in four years, with headline consumer price inflation at minus 0.2 percent in August.
  • Analysts blamed lower oil prices, Germany's value-added tax rate cut, and delayed sales in France, Italy, and Belgium for the fall.
  • Annual price growth in services fell to an all-time low of 0.7 percent in August.
  • Core inflation, which excludes energy, food, and tobacco prices, reached a record low of 0.4 percent in August, down from 1.2 percent in July.
  • The ECB is expected to further lower its forecast for inflation to reach 1.3 percent by 2022, still below its core target of just below 2 percent.
  • 12 of the 19 eurozone countries, including Germany, Italy, Spain, Portugal, and Greece, experienced deflation in August.
  • The euro's rise against other currencies is likely to put downward pressure on inflation by lowering the price of imports.
  • Germany's economy minister, Peter Altmaier, expressed optimism about the country's economic recovery, expecting a V-shaped recovery driven by the resilience of its labor market.
  • However, the BDI business association's head, Joachim Lang, cautioned that the economic situation remains serious, and industry is still below previous year's levels in production and exports.

Statistics:

  • Headline consumer price inflation: minus 0.2 percent in August (down from 0.4 percent in the previous month)
  • Annual price growth in services: 0.7 percent in August (all-time low)
  • Core inflation: 0.4 percent in August (record low, down from 1.2 percent in July)
  • Number of unemployed in Germany: fell for the second consecutive month in August
  • Germany's economic contraction: revised forecast of 5.8 percent (down from 6.3 percent)

Sources:

  • Eurostat data
  • Interview with Frederik Ducrozet, strategist at Pictet Wealth Management
  • Interview with Florian Hense, economist at Berenberg
  • Interview with Peter Altmaier, Germany's economy minister
  • Interview with Joachim Lang, head of Germany's BDI business association