By Paul Hannon
The annual rate of inflation in the eurozone picked up slightly
in October, but marked its 13th straight month at less than half
the rate targeted by the European Central Bank.
The ECB was first confronted by the problem of very low
inflation when figures released on Oct. 31, 2013 showed a sharp
slide in the annual rate to 0.7% from 1.1% in September 2013.
That decline prompted an immediate response from the ECB's
governing council, which in November 2007 cut its key interest
rate. After a long pause, two more rate cuts followed in June and
September of this year, in addition to a new program of cheap,
medium-term loans for banks and the announcement of two bond buying
programs.
Figures released by the European Union's statistics agency on
Friday showed how entrenched the problem of low inflation has
become. Eurostat said consumer prices were just 0.4% higher than in
October 2013, as the inflation rate rose from 0.3% in
September.
However, the core rate of inflation fell to 0.7% from 0.8%, an
indication that the weakness in prices that had been concentrated
in energy and food has spread to other goods and services. Indeed,
prices of manufactured goods fell by 0.1% from October 2013.
Figures released by Eurostat also showed that the jobless rate
was unchanged at 11.5% in September, while the number of people
without work fell by just 19,000, leaving 18.35 million unemployed.
More up-to-date figures for September, released by Germany's labor
agency on Thursday, recorded a surprise 22,000 fall in the number
of people without work.
The persistence of very low inflation and weak economic growth
has led to calls on the ECB to engage in large scale purchases of
eurozone government bonds, a policy similar to the programs of
quantitative easing previously undertaken by the U.S. Federal
Reserve and the Bank of England.
However, policy makers are unlikely to adopt new measures at
their meeting on Nov. 6, with some arguing that it will take time
to assess the impact of the most recent stimulus measures. The
central bank has yet to launch the second of its bond purchasing
programs, and on Thursday said it will buy its first asset-backed
securities in November.
Very low inflation makes it more difficult for governments,
households and businesses to reduce their high levels of debt.
Policy makers also worry that the longer the eurozone spends in a
period of very low inflation, the more likely it is that consumers
and businesses will expect consumer prices to rise modestly in the
future. Such a change in expectations could weaken consumer
spending and business investment, and make the eurozone more
vulnerable to a slide into deflation, or a period of
self-reinforcing declines in prices.
Figures released by Germany's statistics agency Friday
underscored those concerns, since they recorded a 3.2% drop in
retail sales during September, the largest month-to-month fall
since May 2007. In France, consumer spending fell a
sharper-than-expected 0.8% in September from August, marking a weak
end to the third quarter, French statistics agency Insee said on
Friday.
The ECB is anxious to avoid such a "de-anchoring" of inflation
expectations from its target for inflation of just under 2.0%.
"In light of higher risks of dis-anchoring of inflation
expectations, we expect the ECB to deliver more stimulus, altering
the composition of its asset purchase program and greatly expanding
its scale to incorporate government bonds as part of a QE
[quantitative easing] announcement in late 2014/early 2015,"
economists at Citigroup said on Thursday as they cut their 2015 and
2016 growth forecasts for the eurozone economy.
Central bankers have found it difficult to end deflation once it
has taken hold. Japan is struggling to escape a period of deflation
that began in the early 1990s and has impeded economic growth,
stifled investment and put downward pressure on wages.
The Bank of Japan on Friday unexpectedly announced additional
stimulus measures, bolstering its asset purchases for the first
time in over a year and a half, as its 2% inflation target looks
increasingly untenable.
Write to Paul Hannon at paul.hannon@wsj.com
-0-