Mario Draghi
Hm, what next? Mario Draghi's stimulus package failed to move the needle on the eurozone's inflation dial.  Thomas Lohnes—Getty Images

Eurozone “low-flation” ordeal continues as lending stalls again

Jun 30, 2014

The Eurozone continued its long and heavy flirtation with deflation in June, as consumer prices again undershot the European Central Bank's targeted level by a wide margin.

The E.U.'s statistics office, Eurostat, said the annual rate of inflation in the 18 countries that share the euro stayed at 0.5% in June, showing no reaction to a package of interest rate cuts and other measures announced by the ECB at the start of the month.

The data make for a sharp contrast with the U.S., where years of aggressively loose policy from the Federal Reserve appear to have put a floor under prices. The U.S. consumer price index rose 2.1% in the year to May, its highest in over a year.

Inflation in the eurozone has now run at under 1% for nine straight months. The ECB likes to target an annual rate of just under 2%. The undershoot is a big headache for the authorities, who are afraid of a destructive downward spiral in prices and wages taking hold, as they did in the 1930s depression and, more recently, in Japan.

Although ECB President Mario Draghi says there is no such spiral in evidence, prices are falling in year-on-year terms in Greece, Portugal and Cyprus, and the Italian statistics office Istat said Monday that Italy's inflation rate fell to a paltry 0.2% in June from 0.3% the previous month, and 1.2% a year ago.

By contrast, in Germany, where growth has held up better than most other eurozone countries, inflation ticked up to 1.0% in June, according to preliminary data.

Eurostat said that the index was dragged down by volatile items such as food and energy. Stripping these out, the 'core' rate of inflation edged up to 0.8% in June from 0.7% in May.

Elsewhere, there was more bad news from the ECB itself, which said that bank lending to the private sector continued to fall in May, although the rate of decline, when adjusted for loan sales and securitisations, slowed to 1.4% from 1.6% in April.

Eurozone banks are holding back from new loans this year because they're afraid that a new stress test being prepared by the ECB and European Banking Authority will come to the conclusion that they don't have enough capital to cover the risks they already have on their balance sheets.

The figures from Eurostat and the ECB come a day after the Bank for International Settlements, an unofficial club of the world's central banks, warned of a "puzzling disconnect" between a weak world economy and euphoric financial markets. The eurozone has been one of the weakest links in the world economy for most of the last five years, and the ECB earlier in June revised down its forecast for growth this year to a mere 1.0%.

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