Euro Inflation Slows as Draghi Hints at More ECB Stimulus

Euro-area inflation slowed in August and the region’s unemployment rate remained close to a record, increasing pressure on the European Central Bank to take action to kindle the bloc’s faltering recovery.

Consumer prices rose 0.3 percent in August from a year earlier after a 0.4 percent increase in July, the European Union’s statistics office in Luxembourg said today. That’s the weakest rate since October 2009 and in line with the median forecast in a Bloomberg News survey. Unemployment remained at 11.5 percent in July, Eurostat said in a separate report.

Today’s data add to the case for more stimulus when policy makers meet next week. ECB President Mario Draghi has pointed to sliding investor bets on prices, sparking a debate about whether quantitative easing is needed to steer inflation in the 18-nation region back toward the ECB’s goal of just under 2 percent and foster economic growth.

“This is yet another bad indicator of the health of the euro-zone economy,” said Luke Bartholomew, an investment manager at Aberdeen Asset Management. “As every month passes we get closer to the dread of deflation and Draghi looks more and more like Nero fiddling while Rome burns.”

Core Inflation

The core inflation rate, which strips out volatile items such as energy, food, tobacco and alcohol, rose to 0.9 percent from 0.8 percent in July, according to Eurostat.

The euro rose after the report and traded at $1.3182 at 11:16 a.m. Frankfurt time.

In Italy, consumer prices dropped 0.2 percent in August from a year earlier, according to a report by the country’s statistics office. That’s the biggest decline on record and below the median estimate in a separate survey.

In the euro area, “inflation is very low, inflation expectations are drifting lower, but it’s premature to suggest deflation is inevitable,” said Martin van Vliet, senior economist at ING Groep NV in Amsterdam. “We need to see further signs of slowdown, an increased risk of a new downturn before they are willing to say we now have to implement full-blown QE; that’s the nuclear option.”

Draghi’s hint that the ECB is considering large-scale asset purchases, a tool it has so far shunned, came less than three months after policy makers unveiled unprecedented stimulus that included targeted long-term loans for banks and a negative deposit rate.

June Package

Officials have cautioned that the June package will take time to filter through to the economy, which stagnated in the second quarter and may not grow as much as the ECB expected this year. Governing Council member Ewald Nowotny hinted that the institution may cut its growth forecast next week.

“It’s no secret that we are seeing somewhat of a downturn in the economy,” Nowotny told reporters in Alpbach, Austria, late yesterday. Germany’s economy shrank 0.2 percent in the second quarter, France’s stagnated and Italy fell back into recession.

While French Prime Minister Manuel Valls said this week that the ECB needs to use all means at its disposal to lift inflation to its target level, German Finance Minister Wolfgang Schaeuble said in a Bloomberg Television interview it’s the responsibility of governments to spur growth because the ECB has run out of ways to help the euro area.

The ECB’s Governing Council will meet to discuss policy options on Sept. 4 in Frankfurt.

Unemployment Rate

The unchanged euro-area jobless rate in July was in line with the median forecast of 31 economists in a Bloomberg News survey and down from last September’s peak of 12 percent.

The unemployment rate varied across the 18-nation euro area in July, ranging from a low of 4.9 percent in Germany and Austria to 24.5 percent in Spain.

“The long-term cohesion of the euro area depends on each country in the union achieving a sustainably high level of employment,” Draghi said in his Aug. 22 speech at the Federal Reserve Bank of Kansas City’s annual economic symposium in Jackson Hole, Wyoming. “Unemployment is at the heart of the macro dynamics that shape short and medium-term inflation.”

Energy prices fell 2 percent in August from a year earlier, after declining 1 percent the previous month, today’s data showed. Prices of alcohol, food and tobacco dropped 0.3 percent, while the cost of services rose 1.2 percent.

Today’s data are estimates. The statistics office will release final figures for August on Sept. 17.