November 2, 2013 in Business

European Central Bank worries about falling inflation

David Mchugh Associated Press
 

FRANKFURT, Germany – On top of high unemployment and sluggish growth, the European Central Bank has a new headache: an unexpected drop in inflation.

Most people think lower inflation is good news because it makes things easier to buy – and usually it is. But the current slide is just another sign of how weak the economic recovery is in the 17 countries that use the euro.

An official report this week showed a surprise drop in the inflation rate to 0.7 percent in September from 1.1 percent the month before. That’s well below the ECB’s stated goal of close to but below 2 percent that it considers ideal for the economy.

But the monetary authority for the eurozone may be running short of tools to deal with the problem.

The drop in inflation shows demand is weak: People aren’t able or willing to risk spending or borrowing. Sellers can’t raise prices as much.

That remains the case in the eurozone, where unemployment is at a record 12.2 percent and the economy only just emerged from a long recession with anemic growth of 0.3 percent in the second quarter. The worst outcome would be outright deflation. That’s an economic death spiral, when a chronic fall in prices leads people to hold off spending because they know goods will become cheaper. Europe is still some distance from that.

The ECB has already used up most of its traditional medicine: lower interest rates. Its benchmark rate – what it charges to loan to banks – is at 0.5 percent, the lowest since the euro was introduced in 1999.

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