Eurozone Risks Spiralling into Deflation in the Coming Months

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Eurozone inflation continued to decline due to falling oil prices, but the underlying price pressure remained stable, which is an encouraging sign for ECB which tries to keep prices and inflation expectations from falling into deflation.

Consumer prices in 19 Eurozone countries fell to a four-year low of 0.1% in May from 0.3% in April, well below the ECB target of around 2%, as energy prices fell 12% due to global recession and dissent between leading oil producers.

But the core indicator, which excludes food and energy prices, remained at 1.1%, while the even narrower indicator – excluding alcohol and tobacco prices – remained at 0.9%.

Despite the fact that all indicators are below the target level of the ECB, the regulator has few opportunities to control short-term price increases and instead wants to avoid so called de-anchoring of inflation expectations from ECB inflation guidance.

Some officials even warned that inflation could become negative in the coming months, primarily due to low energy prices, which is out of control for Central Banks.

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