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Inflation - eurozone woe

eumapEurozone inflation dropped in July to its lowest level since the depths of the financial crisis, dipping further into the “danger zone”.

Prices rose in the single currency area by 0.4% in July, from 0.5% in June.

The European Central Bank considers that an inflation rate of below 1% poses a risk of deflation. The ECB’s target rate is just slightly below 2%.

The figures have done nothing to dampen fears of widespread deflation across the region.

In Eurostat’s Flash Estimate no country breakdown was provided. But earlier reports showed that several countries have entered deflation, including Greece and Portugal which already have inflation below zero.

The news may force the hand of the ECB to introduce quantitative easing, as was done in the US and the UK, which would inject newly created money into the economies in an effort to push inflation up.

Such a step would be complicated because of the number of countries involved.

The ECB has already cut interest rates, including reducing the bank deposit rate to below zero, and made available cheap long term loans to banks. It promised to take more action if inflation continued to fall.

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