Eurozone threatened by deflation

Eurozone annualised inflation was 1.2% in February, up 0.1% from January, but despite the increase the figures show that the threat of deflation is looming.

Monthly inflation in the eurozone was 0.4%, although Greece saw prices slide 1.1% while inflation remained flat in Spain, Portugal, Cyprus and Slovakia.

The lowest annual rates were reported by Ireland and Portugal, both 0.1%, suggesting both countries are veering towards deflation.

Although the European Central Bank’s (ECB) primary responsibility is to maintain price stability, its ability to use extraordinary measures such as quantitative easing to stimulate the eurozone economy is constrained by this single mandate.

Economists have criticised the central bank for lacking a broader macroeconomic perspective, illustrated by its sluggishness in cutting its base interest rate in response to the financial crisis.

Despite the worsening macroeconomic environment, the ECB raised rates by a quarter point in July 2008 as the upswing in commodity prices drove up inflation.

Compounding the bad news, employment in the eurozone fell 0.3% in the fourth quarter of last year, according to statistics released today. This amounts to a fall of about 453,000 people in employment.

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