Fighting Deflation: ECB Needs Support in Lonely Battle

The cost of living in the Eurozone fell in February by much more than had been expected as the retreat in energy prices deepened and inflation registered widespread weakness across the rest of the economy, preliminary data showed.

The fall was mainly caused by energy prices, which declined by 8%, as opposed to a 5.4% dip in January.

ECB President Mario Draghi has consistently hinted at further measures over the past few weeks and the markets clearly now expect some further bold action. Core inflation, which strips out volatile elements such as food and energy, was at 0.7 percent, down from 1 percent in the prior month.

The slide into deflation is a sharp reversal from the revised 0.3% increase recorded in January. Forex company Moneycorps believed that that euro area will probably have slowed from 0.3% to a provisional 0.1%.

Still, the meeting failed to outline any bold steps and even called on central banks to maintain accommodating policies as weak Chinese growth weighs on all top economies and low commodity prices raise the spectre of deflation.

“Today’s weak core inflation gives doves the upper hand at next week’s ECB-meeting and therefore pretty much seals the deal on additional monetary easing”.

Research from the European Commission suggested that consumer confidence and economic sentiment deteriorated throughout February.

Oil prices are expected to be the most important short-term driver of the inflation rate. The shared currency will come under pressure from slowing growth, the regional migrant crisis, potential Brexit, Greek debt negotiations, sovereign-yield divergences and concern about the health of the European banking sector, he said. Draghi insisted earlier this month the policies were working and that the European Central Bank “will not hesitate to act” if more effort is needed. Mr Weidmann stressed last week that the economic outlook for the euro area was “not as bad as it is sometimes made out to be”, and fears of ultralow inflation feeding back into wages and other prices were “far-fetched at the moment”. Low inflation “is especially bad for debt-laden households, businesses and governments in southern Europe, which will have little scope to inflate away” their debt burden, Teunis Brosens, an analyst at ING Bank, further explained.

The central bank has missed its inflation target of just under 2pc for the past three years.