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Eurozone CPI falls to 5-year low of 0.4%, but joblessness eases

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The eurozone’s prolonged flirtation with deflation got a little heavier in July, as the annual rate of inflation fell to 0.4%, its lowest for five years.

But there was better news on the labor front, as the 18-country currency union saw its jobless rate edge down to 11.5% in June from 11.6% in May, and the bloc’s largest economy indicated that the improvement had continued in July.

The inflation figures are fresh evidence of the divergence between the U.S. and Eurozone economies. Inflation is now back near what economists consider to be normal levels in the U.S., as the economy responds to the Federal Reserve’s massive stimulus program.

In the Eurozone, by contrast, prices are rising by much less than the European Central Bank’s targeted level of just under 2%, with no obvious sign of a turnaround since the ECB announced an interest rate cut and other measures in June.

The ECB has argued that much of the decline in prices in recent months has been due to the volatile components of food and energy, prices for which are down 0.3% and 1% on the year, respectively. But even ‘core’ inflation is running at only 0.8%, well below the ECB’s target, Eurostat said.

Price dynamics may also suffer as the recovery comes under threat from an increased disruption of trade with Russia, but the Eurozone economy is also benefiting at the same time from strong growth in the U.S. and U.K., as well as from a gradual recovery in the health of its banks.

A survey published Wednesday by the ECB showed most banks are starting to relax their lending standards in pursuit of new business, after years of reducing their risks wherever they could.

There have also been signs of improvement elsewhere in this week’s data dump. Eurostat confirmed that Eurozone unemployment fell by 152,000 in June from May to 18.41 million. In Italy, an unemployment blackspot, the number of people out of work fell 2.4% on the month to 3.15 million.

And elsewhere, the German Federal Labor Office said seasonally-adjusted unemployment had fallen by 12,000 in July, the first decline in three months in the Eurozone’s largest and most robust economy. Meanwhile, France’s INSEE reported a surprisingly strong 0.9% increase in consumer spending in June, driven in part by purchases of durable goods.