Eurozone consumer prices climbed by just 0.4% year-over-year in July. This was down from 0.5% in June, and it was worse than the 0.5% expected by economists.
This was also the tiniest increase in prices since October 2009.
“Looking at the main components of euro area inflation, services is expected to have the highest annual rate in July (1.3%, stable compared with June), followed by non-energy industrial goods (0.0%, compared with -0.1% in June), food, alcohol & tobacco (-0.3%, compared with -0.2% in June) and energy (-1.0%, compared with 0.1% in June),” Eurostat said.
The big risk here is that prices go negative and Europe spirals into deflation, a phenomenon that perpetuates itself as consumer and businesses delay spending in anticipation of even lower prices.
Combined with the stubbornly high unemployment rate, this increases pressure on the European Central Bank to leverage monetary policy in an effort to stimulate economic activity and stoke inflation.
“Lowflation in the euro area suggests the European Central Bank will maintain its easing bias,” said Bloomberg economists David Powell and Niraj Shah. “The ECB may take some comfort from the stabilisation of inflation for services … That rate has largely stabilised since hitting a low of 1% in December. Inflation in the service sector is a better indicator of domestically generated pressure on prices than that in the manufacturing sector.”