Euro-Area Inflation Rate Turns Negative as ECB Debates Stimulus

  • Consumer prices declined 0.1 percent from year earlier
  • Jobless rate remained unchanged at 11 percent in August

Euro-Area Inflation Rate Takes Negative Turn in Sept.

The euro area’s inflation rate unexpectedly turned negative in September for the first time in six months, adding pressure on the European Central Bank to bolster stimulus.

Consumer prices in the 19-nation currency bloc fell 0.1 percent from a year earlier, according to a preliminary report published by the European Union’s statistics office in Luxembourg on Wednesday. Economists predicted an inflation rate of zero, according to the median estimate of 38 analysts in a Bloomberg survey. Unemployment in the region remained unchanged in August at 11 percent, Eurostat said in a separate release.

While declining prices are largely a consequence of cheaper energy, policy makers including ECB President Mario Draghi have signaled that they could expand quantitative easing if needed to avert deflation. Two thirds of economists in a Bloomberg survey this month said the ECB will add to its 1.1 trillion-euro ($1.2 trillion) asset-purchase plan, with a majority of those who gave a timeframe predicting the move will come before the end of the year.

Data “was broadly driven by the energy component,” said Giada Giani, an economist at Citigroup Inc. in London. “There are very little inflationary pressures even aside from the oil-price shock. It should be bottom for the year.”

Brent oil has plunged by a quarter since the end of June amid speculation a global glut will be prolonged. Oil is poised for its lowest quarterly average price since the start of 2009.

Energy prices fell 8.9 percent in September from the previous year, Eurostat said. Core inflation, which strips out volatile elements such as food and energy, remained unchanged at 0.9 percent.

More Stimulus

The euro weakened for the first time in three days against the dollar after the report. It fell 0.4 percent to $1.1208 at 2:08 p.m. London time.

The ECB will probably extend QE beyond September 2016, “most likely until mid-2018,” Standard & Poor’s wrote in a report on Wednesday. The program could reach 2.4 trillion euros, the ratings company said.

Still, it’s too early to discuss possible changes to QE, according to ECB Governing Council member Ardo Hansson. Speaking to reporters in Tallinn on Wednesday, Hansson said that “everything is possible” regarding a expansion of the program.

“A lot depends on how inflation will develop, if it slows or accelerates,” he said. “The QE program was announced in March, for 19 months, and it has only lasted for six months. We’re only at the starting phase.”

Speaking in Madrid on Wednesday, Bank of Spain Deputy Governor Fernando Restoy said the ECB “has been very clear it will do everything it can do in order to prevent a scenario of inflation being too low.”

Price Concerns

In Spain, consumer prices fell 1.2 percent from a year earlier in September, almost twice as much as economists predicted, while Germany’s inflation rate unexpectedly turned negative for the first time in eight months.

The setback comes as the euro area’s recovery shows signs of strengthening. Economic confidence unexpectedly increased in September to the highest in more than four years as sentiment in the industrial and services sectors improved. A gauge of economic activity points to a 0.4 percent rate of expansion in the third quarter amid rising orders and backlogs of work.

Even so, unemployment is only falling slowly from the 12.1 percent peak reached in 2013. The region’s jobless rate fell less than initially reported in July and remained unchanged in August, according to Eurostat’s report.

Wages will only increase at a moderate pace amid weak growth and a gradual decline in unemployment, said Michael Schubert, an economist at Commerzbank AG in Frankfurt. That argues against noticeably stronger underlying price pressure. 

“Draghi stressed repeatedly that if economic and inflation prospects deteriorated yet again, the central bank would take further measures,” he said. “This is likely to occur in our view, as both growth and core inflation should be about half a percentage point lower in 2016 than the ECB currently expects.”

In September, the ECB predicted an economic expansion of 1.7 percent next year and an inflation rate of 1.1 percent.

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