Eurozone Records Negative Consumer Prices for the First Time in 4 Years... ECB Faces Increased Pressure

Eurozone CPI in August -0.2%... First Negative Since May 2016
Core Inflation Rate Hits Record Low at 0.4%... ECB Faces Increased Pressure for Stimulus

Christine Lagarde, President of the European Central Bank (ECB)
[Image source=Reuters Yonhap News]

[Asia Economy Reporter Jeong Hyunjin] The European economy is showing signs of falling into a 'price trap.' The consumer price index (CPI), which had frozen due to the impact of the novel coronavirus disease (COVID-19), fell into negative territory for the first time in four years, and the core inflation rate, which reflects long-term price trends, recorded an all-time low. Despite active monetary policies, structural challenges make economic recovery difficult, deepening the concerns of the European Central Bank (ECB).

According to Bloomberg and other sources on the 1st (local time), the Eurozone's consumer price index for August fell by 0.2% year-on-year, marking the first negative reading in four years since May 2016 (-0.1%). Despite the COVID-19 impact, the Eurozone CPI barely showed a positive increase of 0.1% in May, recovered to 0.4% in July, but then plunged below zero. This figure was significantly lower than the expert forecast of 0.2% surveyed by Bloomberg. Among the 19 Eurozone countries, 12, including Germany, Italy, Spain, Portugal, and Greece, recorded negative inflation rates in August.

The August price decline is attributed to weak oil prices and summer retail discounts on items such as clothing. Looking at the CPI components, food and alcoholic beverages prices rose by 1.7%, but energy prices dropped sharply by 7.8%. Additionally, European countries generally offer large discounts on clothing and other items during June and July ahead of the autumn season, but due to sluggish sales this year, the sale period was extended into August. Foreign media reported that some item sales influenced the figures and forecast that prices will rise slightly in September as these factors disappear.

However, as consumption remains weak and demand continues to be subdued, there is still potential downward pressure on prices. The core inflation rate, which reflects long-term price trends, fell to an all-time low. The Eurozone's core inflation rate for August was 0.4%, a sharp decline from 1.2% in July, and below the lowest level recorded in 2015 (0.6%). The significant drop in core inflation, which excludes volatile agricultural and petroleum prices, suggests that structurally low inflation may persist for a long time.

The burden on the ECB, which is implementing aggressive monetary policies to prevent a COVID-19-induced recession, has increased. Despite injecting large-scale liquidity into the market through negative interest rates and asset purchase programs, the effects are interpreted as limited. The market expects that the ECB will revise its earlier forecast of a 1.3% inflation rate by 2022 at the monetary policy meeting scheduled for the 10th.

Experts believe that after reviewing recent economic indicators, the ECB may extend or expand the 'Pandemic Emergency Purchase Programme (PEPP),' which is currently set to run until June next year. Philip Lane, the ECB's Chief Economist, said last week, "Following the economic shock caused by COVID-19, the next step will be to raise prices," adding, "We are ready to introduce more policies if necessary." Daniela Ordonez, an economist at Oxford Economics, forecasted, "If the core inflation rate continues to fall, the ECB will face pressure to implement monetary policies to stimulate the economy."

This content was produced with the assistance of AI translation services.