EU In Deflation For Four Straight Months

Euro Deflation

Consumer prices in the euro currency area fell by 0.1 percent during May 2016.

A slew of fresh data has shown that the Eurozone is still in deflation, now in its fourth straight month as its efforts to revive the euro has fallen flat. Economists are hoping for increased consumer prices in the next few months, but the bloc is concerned whether it will meet the European Central Bank’s inflation targets.

According to the European Union’s statistic agency on Tuesday, consumer prices were down for the second straight month in the euro currency area by 0.1 percent in May 2016.

ECB policy makers have been trying to stimulate the economy with a host of packages since mid-2014 to increase inflation to just under 2 percent, frustrating the ECB as their new attempt launched in March failed yet again.

For over three years, the EU’s inflation rates have been below ECB rates with two of the years seeing a growth rate of 0.5 percent or lower. The Eurozone has been in deflation for eight months since December 2015, with May being the most recent month to reach negative inflation levels.

ECB economists, however, are banking on higher inflation forecasts on Thursday in the wake of rising oil prices for the second half of this year.

Economists at Standard & Poor’s see oil prices climbing 30 percent higher than assumptions given by the ECB for the year. The S&P also said that oil prices are up 75 percent from its lowest point in late January of this year.

Another factor that may affect the Eurozone’s inflation would be the U.S. Federal Reserve’s possible move to increase its short-term interest rates in the next few months. The move would weaken the euro and increase prices of imported goods and services.

Lending in the private sector has also increased thanks to the ECB’s efforts to increase bank lending. Private sector figures were up 1.2 percent in April compared to the previous year and higher than 1.1 percent in March. Lending to households however failed to match expectations.

The strength of economic growth in the region will be the driving force for the ECB to be able to meet its inflation target, but data shows that such growth is likely to remain weak.

The Eurozone’s modest recovery is part of the reason inflation has been low in recent years, with the economy getting back on its feet in the first quarter of this year.

The core rate of inflation in the Eurozone was only at 0.8 percent up from 0.7 percent in April, according to Eurostat figures, which excluded food and energy costs since they are dictated by world markets.

Despite the Eurozone’s greater success in reviving the economy in the first quarter than their U.S. and U.K. counterparts, economists expect the economy to be at par with 2015 figures as the economy is predicted to slow in coming months.

Eurostat figures released Tuesday also revealed that jobless rates are still unchanged from the 10.2 percent figure in March until April despite figures noting that 63,000 people moved into jobs.

ECB economists are still forecasting numbers below their target in 2018 with policy makers likely leaving their policies unchanged in their meeting on Wednesday and Thursday. ECB President Mario Draghi may also set new stimulus measures without a decisive pick-up in inflation this year.

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