Euro zone inflation fails to speed up in wake of Brexit vote

Inflation in the euro zone failed to accelerate in August, adding to signs that the euro area's economic outlook deteriorated ahead of a European Central Bank meeting next week.

Consumer prices rose 0.2 per cent in August from a year earlier, the European Union’s statistics office in Luxembourg said on Wednesday.

The medium estimate in a Bloomberg survey was for an increase of 0.3 per cent.Two months after the UK's Brexit vote, the 19-state euro zone is beginning to show signs of faltering, suggesting that more stimulus may be warranted.

Business and consumer sentiment declined, and executives are warning that orders may suffer from political uncertainty.

The International Monetary Fund has already cut its forecast for euro zone growth next year, and the European Central Bank will release new projections after its meeting next week.

More QE

ECB president Mario Draghi "is failing to get inflation up to 2 per cent," Michael Spies, a strategist at Citigroup in Frankfurt said in an interview on Bloomberg TV. "He thinks about what he still can do in terms of quantitative easing, and I think that's the way he's going to operate – there will probably be more QE and longer QE."

Policymakers have already deployed a raft of unconventional stimuli, including large-scale asset purchases, negative interest rates and long-term loans that see banks getting paid for extending credit to companies and households. Still, inflation remains far below the ECB’s goal of just under 2 per cent, a level it hasn’t reached since early 2013.

The Frankfurt-based bank currently predicts price growth will accelerate to 1.6 per cent in 2018.Core inflation slowed to 0.8 per cent in August from 0.9 per cent a month earlier, Eurostat said.

German inflation unexpectedly decelerated to 0.3 per cent, while consumer prices extended their decline in Spain. Euro zone unemployment remained unchanged at 10.1 per cent, according to a separate release.

Delayed reaction

The inflation report comes one day after a European Commission survey showed that economic confidence declined across most countries and most sectors in a delayed reaction to Britain's vote to leave the EU.

The data may reopen the debate about more stimulus at the ECB’s September 8th meeting, after the economy’s relative resilience over the summer months led economists, including those at JPMorgan Chase and Danske, to push back projections for further easing.

– (Bloomberg)